Inflation and Its Major Causes - Assignment Example

InflationInflation is a situation, when the prices of goods and services increases very rapidly but the availability of the goods and services remain same. Poor people cannot purchase everything because of rise in prices, so the rate of poverty also increases in the affected economy of the inflation.The effects of inflation are faced by everyone in the economy (Dineshbakshi.com, 2014). . The producers of the goods and services increase their productivities to earning the more profits in the situation of higher prices.

The situation also creates an inequality in the society, as the poor become poorer and rich become richer. It not only affects the economy internally, but also disturbs the balance of trades and the exchange rates of money. The major causes of inflation are as follows:The demand pull inflationThe cost push inflation. The situation of demand pull inflation arises in the results of increase in the aggregate demand, but the supply remains same in the markets. So the prices rise, and the situation of inflation occurs.

If the costs of the production rise in the market, then the prices of factors of productions also increase. Increase in costs of productions result in the rise of goods and services prices in the public markets. To solve the issue of inflation, the government has to introduce new strategies of fiscal as well as monetary policies. Through these policies, the profits of savings are increased in the banks, and then the people save more for profits. Rate of interests is also fixed at low ratio, so the investors start new businesses to maintain the level of demand and supply in the market.

Referenceshttp://www.dineshbakshi.com/igcse-gcse-economics/economic-indicators/revision-notes/1323-effects-of-inflation