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Problems about inflation

Price inflation is the main problems that arises in an economy because it affects number of costs to the economy. These are some causes from inflation:

(1) It grind down the value of goods and money

As there is a rise in the price, consumer buy less goods. Due to

this effect, the goods are stored as a monetary form, so the value of goods fall. In this period of time people try to use their money and buy properties instead of keeping the money in the bank as a monetary form.

(2) It reallocates the income

The inflation doesn’t affects the same redistribution of income to the individuals and group. For example, some individuals can protect the income or their assets from the inflation but some cannot.

(3) Investment will fall

As there is inflation, there will be less interest for the consumers and their spending, which can also decrease the aggregate demand. So the inflation increases cost and reduce competition, which can lead to decreasing demand. Finally, firms may expect that interest rate must go up to deal with inflation and this may weaken business men’s confidence. So, this will be likely to postpone capital investment.

(4)It can increase unemployment

As the cost increases, this can lead to people lose their jobs, because firms will find new ways like new technology, to substitute with the labour

How to solve the problems by using fiscal and monetary policy?

*Monetary policy means adjusting the interest rate and controlling the currency supply.

*Fiscal policy means the government adjusting the tax rate and spending to control the aggregate demand of the society.

Both fiscal and monetary policy are used to track the policies of the growth of the economy and to control the inflation rate.

Monetary Policy

Monetary Policy is usually controlled by the Central Bank which also includes:

(1) Adjusting the base interest rates.

(2) Controlling the supply of money to increase the supply of money

How does...