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Inflation:causes and solving - Article Example

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The summary of the article helps to define inflation as a persistent rise in prices that cause the purchasing power of a nation to significantly drop. This is a normal economic syndrome as long as the annual rate or percentage remains comparatively low…
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Inflation:causes and solving
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Download file to see previous pages The summary of the article helps to define inflation as a persistent rise in prices that cause the purchasing power of a nation to significantly drop. This is a normal economic syndrome as long as the annual rate or percentage remains comparatively low.Once the percentage rises over a pre-determined level, it is considered an inflation crisis And then it has its impacts across several facets of the economy.From the article, one can infer that expansive public spending as a result of budgetary surpluses, population growth, and rapid growth in demand are the root causes of inflation. By definition, a budgetary surplus is the amount by which government revenue exceeds government expenditure during a financial year. This excess of revenue over expenditure means the government has more money to inject into the economy and up the circulation of money in the economy. In an unrelated manner, the amount of money in circulation in a country's economy could result from the government printing an excess of money to deal with a crisis. This brings excess money to the disposal of citizens who would normally manifest their propensity to spend by a growth in their demand. As a result, prices end up rising at an extremely high speed to keep up with the currency surplus. This is called the demand-pull, in which prices are forced upwards because of a high demand.
On the other hand, population growth could be the direct effects of human factors like migration or high birthrates. That is to say the higher the birth rate, the higher the population at any particular time. Likewise when the number of people entering a country as immigrants outweighs the number of people leaving the country, the size of that country's population is bound to increase. Meanwhile, a growth in demand entails not only an increase in the quantity of demanded of goods and services, but also a complete rightward shift of the demand curve. According to macroeconomic theory (Lawrence & Terry, 2003) the impact of these factors in causing inflation can best be understood by looking at how they change the trend of both aggregate demand and supply in an economy.
Firstly, a budgetary surplus increases the amount of money in circulation in the economy. Matching such surplus to the population growth, means a surge in the aggregate demand for goods and services with a consequent increase in the spending power of individuals. Other factors being constant, the capacity of the country to produce goods and services is exceeded, leading to the category of inflation called demand-pull inflation. The article supports the above findings by holding that the size of increase in aggregate demand significantly exceeds real supply levels in a sustainable manner. As the increase in aggregate demand is unmatched by a similar increase in production, uncalculated consumption and the failure to nurture production lead to sudden increases in prices and hence an increase in purchasing power.
In an unrelated manner, the supply of money in an economy can increase when the government adopts a policy to print excess money in a bid to put a crisis under control. This view about the cause of inflation can be understood through a review of the quantity theory of money which says that an abnormal growth in the money supply in an economy would cause inflation. This happens because the extra money boosts the level of demand, and so causes demand-pull inflation.
The most resounding case in point is the hyperinflation in Zimbabwe scaling over 6,500% (six thousand five hundred percent). Such policy to increase the supply of money has the spin-off effects of injecting more money into the economy, as well as increases the citizen's disposable income. This increase in disposable income always translates into an increase in the propensity to consume and then to a consequent increase in the demand for goods and services. When an increase in the demand for goods and services is not parallel to the production and supply capacity of the economy, prices end up ...Download file to see next pagesRead More
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