Inflation, Disinflation and Deflation - Essay Example

It is usually seen when the prices of products within the economy deep from their current levels to much lower levels over time. Disinflation occurs within the economy only for a short time, and it takes place especially when an economy is undergoing a recession. Deflation is the decrease which takes place in the cost of products, when the rate of inflation goes below zero percent. Its greatest effect is that, over time, it increases the value of the currency being used within the economy. This ensures that one is able to buy more products with the same amount of money which they had when inflation was taking place.

These three aspects of the economy are extremely powerful in determining how it is working, whether it is doing well or not. Furthermore, the central banks use the measurements of these aspects in order to determine what their fiscal policies are going to be. Inflation can be termed as the gradual rise, over a certain period, of the cost of products in a financial system (Hartwig 23). In addition, when inflation takes place, it is always found that the value of the currency used in a particular economy also decreases.

This is because the money available in the economy is able to purchase a limited number of products when compared to the previous period. All the countries in the world whose economies are connected to money have a way of finding out the inflation rate of their currency. Every year, the percentage of inflation is calculated and the result is often used in the planning of the budget for the forthcoming year. Inflation has a massive effect on how the economy works, and this effect is sometimes positive, or negative, depending on the situation.

One of the negative effects of inflation is that it becomes extremely risky to hold onto large sums of the currency, which is undergoing inflation, because one does not