How inflation affects function of money essay

Inflation means that the value of money decreases. Thus we have two important variants of CPI: Thus, during inflation of anticipated variety, there occurs a diversion of resources from priority to non-priority or unproductive sectors.

Yet if the inflation rate is low and stable, money can function better. It is not high prices but rising prices that constitute inflation.

Now, when there are high rates of unanticipated inflation, money loses its value and therefore cannot function as a medium of exchange as people lose confidence in money. On the other hand, people earning flexible incomes may gain during inflation.

Essay on Inflation: Types, Causes and Effects

These effects of inflation may persist if inflation is unanticipated. Fiscal policy changes, such as an increase in tax rates leads to an upward pressure in cost of production.

Anyway, CPI stems from the leftward shift of the aggregate supply curve. If the rate of annual price increase lies between 3 p. In reality, people cannot predict accurately future events or people often make mistakes in predicting the course of inflation.

That is why government is then accused of causing inflation. Inflation and unemployment are the two most talked-about words in the contemporary society. Purchasing power and, hence, aggregate demand, may also go up if government repays public debt.

Money loses its store of value function. Given full employment, such increase in aggregate demand leads to an upward pressure in prices. Thus, there is no strict relationship between prices and output. Medium of Exchange - used for buying and selling goods. Once the government curbs are lifted, the suppressed inflation becomes open inflation.

As a result, real incomes of this income group increase. But wage rate changes with a long time lag. Below the full employment stage this AS curve is positive sloping and at full employment stage it becomes perfectly inelastic. Again, there is a tendency on the part of the holders of black money to spend on conspicuous consumption goods.

It is an increase in the overall price level.

How Does Inflation Affect the Function of Money

In Maythe cost of price of a toilet paper itself and not the costs of the roll of the toilet paper came to Zimbabwean dollars. However, no such hard and fast generalizations can be made. How Inflation Affects Function of Money Essay Inflation is defined as a persistent increase in general price level.

Inflation is measured by the proportional changes over time in some appropriate price index, commonly a consumer price index.

Qu.2) Explain how inflation affects the functions of money. - Inflation can be defined as the persistent increase in the general price level of goods and services in an economy over a period of time.

Because inflation affects everything. Inflation Begins With Money Losing Value. To understand the effects of inflation, consider the following example of the purchasing power of $ incompared to today.

Inflation Transfers Money From Savers and Investors to Debtors. Because inflation affects everything. Inflation Begins With Money Losing Value.

To understand the effects of inflation, consider the following example of the purchasing power of $ incompared to today.

Inflation Transfers Money From Savers and Investors to Debtors.

How Does Inflation Affect the Function of Money

The effects of inflation on the function of money depend on the rate of increase inflation. For example a mild inflation will have no effects on the function of money.

Inflation Affect on the Function of Money

However, as the rate of inflation increases the ability of money to fulfil its functions is negatively affected.

Inflation and the Function of Money Readers Qu. EXPLAIN HOW INFLATION AFFECTS THE FUNCTIONS OF MONEY Money is said to have four functions 1. Medium of Exchange - used for buying and selling goods. 2. Store of Value: We value goods and wealth through money. Money makes it .

How inflation affects function of money essay
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How Does Inflation Affect the Function of Money - New York Essays