What are the favourable effects of inflation?

Answer 1

A+= Money loses its value

What is Inflation . Inflation is a rise in the general price level and is reported in rates of change. Essentially what this means is that the value of your money is going down and it takes more money to buy things. Therefore a 4% inflation rate means that the price level for that given year has risen 4% from a certain measuring year (currently 1982 is used). The inflation rate is determined by finding the difference between price levels for the current year and previous given year. The answer is then divided by the given year and then multiplied by 100. To measure the price level, economists select a variety of goods and construct a price index such as the consumer price index (CPI). By using the CPI, which measures the price changes, the inflation rate can be calculated. This is done by dividing the CPI by the beginning price level and then multiplying the result by 100. Causes of Inflation There are several reasons as to why an economy can experience inflation. One explanation is the demand-pull theory, which states that all sectors in the economy try to buy more than the economy can produce. Shortages are then created and merchants lose business. To compensate, some merchants raise their prices. Others don't offer discounts or sales. In the end, the price level rises. A second explanation involves the deficit of the federal government. If the Federal Reserve System expands the money supply to keep the interest rate down, the federal deficit can contribute to inflation. If the debt is not monetized, some borrowers will be crowded out if interest rates rise. This results in the federal deficit having more of an impact on output and employment than on the price level. A third reason involves the cost-push theory which states that labor groups cause inflation. If a strong union wins a large wage contract, it forces producers to raise their prices in order to compensate for the increase in salaries they have to pay. The fourth explanation is the wage-price spiral which states that no single group is to blame for inflation. Higher prices force workers to ask for higher wages. If they get their way, then producers try to recover with higher prices. Basically, if either side tries to increase its position with a larger price hike, the rate of inflation continues to rise. Finally, another reason for inflation is excessive monetary growth. When any extra money is created, it will increase some group's buying power. When this money is spent, it will cause a demand-pull effect that drives up prices. For inflation to continue, the money supply must grow faster than the real GDP. Effects of Inflation The most immediate effects of inflation are the decreased purchasing power of the dollar and its depreciation. Depreciation is especially hard on retired people with fixed incomes because their money buys a little less each month. Those not on fixed incomes are more able to cope because they can simply increase their fees. A second destablizling effect is that inflation can cause consumers and investors to changer their speeding habits. When inflation occurs, people tend to spend less meaning that factories have to lay off workers because of a decline in orders. A third destabilizing effect of inflation is that some people choose to speculate heavily in an attempt to take advantage of the higher price level. Because some of the purchases are high-risk investments, spending is diverted from the normal channels and some structural unemployment may take place. Finally, inflation alters the distribution of income. Lenders are generally hurt more than borrowers during long inflationary periods which means that loans made earlier are repaid later in inflated dollars.

Answer 2

Inflation is, essentially, a rise in prices i.e. a rise in the price level. It can be caused by many factors. Among these are:

Increase in exogenous consumption

Increase in exogenous investment

Increase in government expenditures

Decrease in taxes

Increase in money supply

Decrease in exogenous money demand

The effect is that goods are more expensive. In addition, if wages do not change, real wages (found by dividing wages, W, by the price level, P) decrease due to an increase in the price level.

Answer 3

Inflation erodes the value of your savings by a value equal to the inflation rate, minus any interest the bank pays.

for example, say your account's interest rate is 1% (it's probably lower).

Next, find out the inflation rate. The Bureau of Labor Statistics claims it's 3.1%. However, the government is known for skewing statistics; If we measure inflation the exact same way the government did back prior to 1980, the inflation rate clocks in at a mind-numbing 11%.

Therefore, 11% inflation minus 1% interest comes out to 10%. And so, the math reveals that americans lost 10% of their purchasing power last year, which means that in the case of a savings account, you are basically paying the bank to hold your money for you.

If I were you, I would protect my savings with something tangible such as gold or silver, not with pixels in a bank account or paper under a mattress.

Answer 4

will have no money ideat but the press do make it sound worse then it is

Answer 5

Inflation increases the price levels in an economy.

Answer 6

purchasing power of moneyfalse why?

Answer 7

favourable effects of inflation