Wait a second!
More handpicked essays just for you.
More handpicked essays just for you.
The price of goods and services
Inflation
Literature on causes of inflation
Don’t take our word for it - see why 10 million students trust us with their essay needs.
Recommended: The price of goods and services
Questions:
1. What is inflation?
Inflation occurs when the prices of goods and services increase over time. Inflation cannot be measured by an increase in the cost of one product or service, or even several products or services.
What are the causes of inflation?
Economists distinguish between two types of inflation: Demand-Pull Inflation and Cost-Push Inflation. Both types of inflation cause an increase in the overall price level within an economy. Demand-pull inflation occurs when aggregate demand for goods and services in an economy rises more rapidly than an economy’s productive capacity. One potential shock to aggregate demand might come from a central bank that rapidly increases the supply of money.
Is inflation desirable and what can be done to control inflation in a market economy?
Tie the creation of money to the creation of Stuff. Reduce the government’s spending to stop new money from entering the system. Sell bonds to remove money from the system (how do you get people to sell their money for bonds? Raise interest rates!). Or make it more expensive for Banks to borrow mo...
Reduce it by placing higher interest rates and enforcing higher taxes and spending cuts (Smith David).
Inflation occurs when consumers are spending like crazy, and “the central banks flood the system with too much money,” (DPE, 37). They do so through
Yes, it will increase inflation but create more job opportunities and unemployment will decrease if government intervention occurs. Yes in the long run this might be bad but people care about tomorrow more than they care about 3 or 4 years from now or even more. As Lord Keynes once said “in the long run we are all dead”.
The problem with balancing an economy is that human judgment and evaluation of economic situations enter into the equation. Establishing a constant growth level in the money supply would eliminate the decision making process of the central banker. The problem with human intervention is the short-sided nature of many of the policies designed to aid the economy. Such interventions, which yields unintended negative consequences, is the result of the time inconsistency problem. This problem is understood through situations during which central bankers conduct monetary policy in a discretionary way and pursue expansionary policies that are attractive in the short-run, but lead to detrimental long-run outcomes. Friedman believes that by leaving money growth decisions to an individual, the results are poor long-run management and eventually high inflation rates, an obvious detriment to the economy.
In an economy, aggregate demand (AD) accounts for the total expenditure on goods and services. It has five constituents; Consumer expenditure (C), Investment expenditure (I), Government expenditure (G), Export expenditure (X) and import expenditure (M), This gives us: AD= C+I+G+X-M. Aggregate supply (AS) on the other hand is the total supply of goods and services in the economy. Increasing AD and decreasing AS both cause demand-pull and cost-push inflation respectively. Demand pull inflation occurs when aggregate demand (AD) continuously rises, detailed in Figure 1. The AD curve continuously shifts to the right, as demand continuously increases, from point a to b to c. This consequently causes an increase in the price level of goods and services. As prices rise, costs of production also increase, causing producers to reduce output (a decrease in aggregate supply (AS)), shifting the AS curve to the left and leading to yet another increase in prices, (t...
Money has evolved with the times and is a reflection of the progress of man. Early money was itself a physical commodity, grain, gold or silver. During the vital stage, more symbolic forms of money such as certificates of deposit, bank notes, checks, letters of credit, bonds and other forms of negotiable securities came into prominence. Social development transformed money in to a trust, “In God We Trust' it says on the back of the ten-dollar bill.” (The Ascent of Money, 27) Today money is faith in the person paying us and belief in the person issuing the money he uses or the institution that honors his money. This trust has no end it can be extended to a greater number of individuals.
"Regulation of money supply needs to be depoliticized... especially as it applies to virtual currencies" - Al Gore
No economic systems can regulate the production or value of the currency, the system that crypto-currencies are based upon was created by Satoshi Nakamoto - purposely creating Bitcoin which the practise of fractional reserve banking would be virtually impossible. Bitcoin is currently the most successful crypto-currency to date - created in 2009, this anonymous decentralized digital currency has been the target of several raids and hacking sprees; the media are contemplating the significance of Bitcoin in our current worlds economy. Whether it has potential of overruling fiat-currencies or if it’s just a puerile project created by the aberrant Satoshi Nakamoto. Global Perspective Since its creation in the ‘60s, the Internet has paved the way for numerous phenomenons that have affected the way that we live, the way we communicate and that have affected the worlds economy.
This is demand pull inflation, in this case the real output (real GDP) increases. It is caused by continuing rises in aggregate demand. Generally, it occurs when aggregate demand for goods and services in an economy rises more rapidly than an economy’s productive capacity. One potential shock to aggregate demand might come from a central bank that rapidly increases the supply of money. The increase in money in the economy will increase demand for goods and services from D0 to D1. In the short run, businesses cannot significantly increase production and supply (S) remains constant. The economy’s equilibrium moves from point A to point B and prices will tend to rise, resulting in
...two aspects, nominal and real, both measuring two different controls. Nominal measures what is considered a “price tag” of a loan, which includes the price of inflation. While real measures the cost of a loan without inflationary rates. From nominal and real rates there are also lowered and raised rates. When the interest rate is lowered consumer spending grows while savings decrease. Spending on items such as housing becomes one of the ways the AD rises. Though AD rises it pulls the economy out lack of spending, but puts the economy into the possibility of inflation. Differentiating from low rates, high rates stop inflation but creates the possibility of recession. High interest rates create a fall in demand for goods and services. This fall of AD puts a stop to spending, borrowing and much more, creating the incentive to save ultimately putting a haul to inflation.
Above you will see a copy of the aggregate supply and demand model. I am using this as an example to show how the GDP can be affected. You will notice that the AD1 line has shifted right to AD2. This is an example of demand pull inflation. Demand pull inflation is caused by an increase in expenditure in the economy. The expenditure is made up of consumers spending on domestic products, investment, government spending and exports. When the expenditure rises the demand for products also rises pulling the aggregate demand line to the right. When expenditure decreases the line shifts to the left. This is linked very closely to Inflation. Below you will see a time series of the inflation in France between 1970 and 2008.
But before we start, it is worth getting a better understanding of the terms, inflation and unemployment. Inflation refers to an increase in the overall level of prices within an economy. In simple words, it means you have to pay more money to get the same amount of goods or services as you acquired before. By contrast, the term unemployment is easier to understand. Generally, it refers to those people who are available for work but do not find work.
Inflation is the rate at which the purchasing power of currency is falling, consequently, the general level of prices for goods and services is rising. Central banks endeavor to point of confinement inflation, and maintain a strategic distance from collapse i.e. deflation, with a specific end goal to keep the economy running smoothly.
Inflation is one of the most important economic issues in the world. It can be defined as the price of goods and services rising over monthly or yearly. Inflation leads to a decline in the value of money, it means that we cannot buy something at a price that same as before. This situation will increase our cost of living.
It behaves like a subsidiary force that felicitates primary inflation forces such as cost-push inflation. It has an effect on the actual rate of inflation, as market sentiments have an effect on the economic stimulus that drives inflation. This is most felt when the anticipated prices of the commodities as perceived by the economic agents result in a constant rise in inflation. This is a result of the current actions that include hoarding or advanced buying of commodities, taken by the agents due to expectations of rising prices in the future.