Documente Academic
Documente Profesional
Documente Cultură
Inflation refers to a rise in the general price level and a corresponding fall in the value of money over a period of time. It is a state in which the value of money is falling i.e. prices are rising.
Formula:
Rate of inflation= (price level of year t- price level of year (t-1))/ price level of year (t-1)*100
IMPACT OF INFLATION:
As the result of diverging relative prices, two definite effects of inflation are 1. A re-distribution of income and wealth among different groups. 2. Distortions in the relative prices and output of different goods, or sometimes in output and employment for the economy as the whole.
By contrast, in a high- inflation economy it's much harder to distinguish between charges in relative prices and changes in the overall price level.
Inflation also distorts the use of money. Currency is money that bears a zero nominal interest rate. If the inflation rate rises from 0 to 10 percent annually, the real interest rate on currency falls from 0 to -10 percent per year. As a result of which people devote real resources to reducing their money holdings during inflationary times. There is also menu costs of inflation in addition to the distortion on prices and money value. The idea behind menu costs is that when prices are changed , firms must spend real resources adjusting their prices. For instance, restaurants reprint their menus, mail-order firms reprint their catalogs, cities adjust parking meters etc.
TYPES OF INFLATION
The two different types of inflation include: Cost push inflation Demand pull inflation
Profit-push inflation In many industries, there are only a small number of companies. Easy for them to raise prices to protect their profit margins. Supply-side shocks Dramatic and unexpected increases in the prices of key materials, such as oil or energy in general.
Fig 1 Fig 2
Fig 3