This essay will look at two important theories of inflation, and will show the similarities and differences between both of these theories.
Inflation occurs when there is a sustained increase in the general level of prices. This means that it isn't a one-off increase in prices, or a situation where prices are only rising in certain sectors of the economy. When inflation is happening, money loses its value, as its purchasing power is reduced. Currently, inflation in the UK is around 2% a year, which is lower than it has been in the past. For example, the inflation rate averaged 15% between 1973 and 1981, and 6% between 1981 and 1990 (Begg, p.274).
Inflation can cause a number of problems for an economy, so it can be said that there are costs of inflation. The costs of inflation include the menu costs, which are the costs which occur when firms need to change prices, and the shoe leather costs, which occur when people try to reduce their cash balances, because money quickly loses its value during times of inflation. Another cost of inflation is the effect it has on the distribution of wealth in an economy. Inflation can cause a redistribution of wealth from savers to borrowers, because the real value of debts (the nominal value minus the inflation rate) is falling. Borrowers gain because their repayments are falling in real terms, while savers see the real value of their wealth fall. Finally, inflation can cause problems if a country has higher inflation than overseas, as industry becomes less competitive and export markets suffer.
The Quantity theory of money was one of the earliest attempts to explain inflation, and it is still popular with some modern economists, who are sometimes known as Monetarists. The quantity theory looks at the importance of money in the economy, and shows that increases in the money supply lead to inflation. There are two versions of the Quantity theory, but they both lead to the same results.
"Inflation that is higher than expected benefits debtors. Inflation that is lower than expected benefits creditors."... Inflation was first noticed after the adoption of capitalism. ... The law of demand dictates this cause of inflation. ... While it is true that actual inflation normally does not stray far from anticipated inflation, an unanticipated inflation causes a loss to creditors that can"t be avoided. ...
These are inflation, deflation, hyperinflation and stagflation. Inflation can be a good thing or a bad thing, in a good economy with low employment it is good to have inflation, but when there is bad unemployment inflation is a bad thing because people do not have or earn enough money to keep up with changing prices. ... When there is inflation the value of a dollar never stays constant. ... Inflation in effect wipes out your purchasing power. ... Stagflation ("The Simultaneous occurrence of substantial unemployment and inflation")(Schiller p.327) In theory inflation and unemployment move in o...
Inflation is defined as a sustained rise in the general price level. When the inflation figures' come out once a month and are quoted on the news, the newsreaders give certain percentage rates of inflation'. ... This is much harder when inflation is high. High inflation tends to coincide with variable inflation and, therefore, very unstable prices. Unanticipated inflation causes uncertainty. ...
What is inflation? ... Hence, inflation is not easy to define in practice. This should be kept in mind when discussing how to defeat inflation. ... Some say that inflation is not only expected, but also often, needed. ... There are even examples of inflation declining while the economy booms. ...
The answer is inflation. ... When this happens we may get demand-pull inflation or cost-push inflation. ... There are four other types of inflation that I will talk about and those are anticipated inflation, unanticipated inflation, stagflation, and hyperinflation. When we are expecting inflation to occur, we have anticipated inflation. ... The next type of inflation is unanticipated inflation. ...
Inflation can be divided into cost-push inflation and demand-pull inflation. Cost-push inflation is defined as "inflation whose initial cause is a rise in production costs". ... Inflation expectations can also cause inflation. ... Not every one suffers from the inflation. ... Today the market interest rates reflect inflation and inflation expectations. ...
Generally, a moderate rate of inflation has been the ultimate goal. ... So too does the belief that inflation originates in the labor market. ... Are there real long-term benefits to low, or zero, inflation? What are the real effects of low inflation? ... This implies that in the short-run, nominal wage rise will not fully absorb the actual inflation, and as such, there is scope for reducing unemployment through inflation. ...
Inflation Over the last century many countries throughout the world have experienced inflation as their major economic problem. Expensive wars have traditionally been recognized as the sources of inflation. ... World War II brought the persistent inflation that economists came to expect. ... There are two opposite theories regarding inflation. Monetarism indicates that inflation is due to increases in the supply of money. ...
