Inflation Rises

Q. 1) It has been argued that inflation is both good and bad. How can this be? Explain. Are government efforts to control inflation well-advised? Explain. In economics, inflation is a rise in general level of prices of goods and services in an economy over a period of time Your Assignment Will Be Complete Easily! – check  .org/author/sarakirchoff “>  . When the general price level rises , each unit of currency buys fewer goods and services. It is a loss of real value in the internal medium of exchange and unit of account in the economy. A chief measure of price inflation is the inflation rate. As inflation rises, every dollar we own buys a smaller percentage of good or service.

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The value of a dollar does not stay constant when there is inflation. The value of a dollar is observed in terms of purchasing power. When inflation goes up, there is a decline in the purchasing power of money. Inflation is a symptom of a growing economy. If we have no inflation, our economy is not growing. Moderate rates of inflation allow prices to adjust and are sign of a healthy economy. Due to inflation there is circulation of money. Usually if prices go up, wages tend to go up with it sooner or later, so everything balances out. Just look 50 years back, both wages and prices were much lower than they are now.

That doesn’t mean everything was cheaper. Without inflation most assets would decline in value, and business profits would evaporate, along with any chance of gainful employment. The only people who would benefit would be creditors, and that to, only if they were lucky enough to find people who wanted to borrow their money. That would be doubtful, since business and investment opportunity would be nil, providing little reason to be a borrower. If inflation were zero, or if prices were actually falling business profits would fall, too. A steady rate of inflation has no effect on debt.

If we have negative inflation, the economy is probably shrinking. If there are people spending money (a good economy, unless people borrow everything they are spending), then the price of goods start to go up as demand increases. Then people want to be paid more so that they can still afford to buy the things they need and want which puts more money into the economy, which makes the prices go up again. It is like a wage spiral. The reason inflation is bad is that wage increases always lag behind price increases. So inflation hurts regular people.

There is also a lot to consider with interest rates, loans, and fairness to people. There exists a lower international competitiveness. Basic cost of manufacturing rises. The government tries to control it through the use of the central banking system which attempts to fluctuate the supply of money as a means of controlling the economy. Canada’s annual rate of inflation, which had reached a high of 12. 5 per cent in 1981, has averaged 2 per cent since 1991. Canadian monetary policy is aimed at promoting price stability and harnessing the benefits of low inflation.


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