It affects the distribution of real income, people on fixed incomes suffer as the purchasing power of their incomes decrease as price levels rise. Secondly, purchasing power od households on fixed income decline, as inflation tends to result in more unequal distribution of income as those on lower incomes find their wages do not rise as quickly as those on higher incomes. In times of high inflation household tend to purchase real assets that retain their real value since their prices rise faster than the inflation rate. Finally, another negative impact is the income tax earners suffer from fiscal drag pay rises to combat inflation put them into higher marginal tax brackets. This means as employees’ nominal wages increase with inflation their real wage (purchasing power of nominal wages) may remain constant.
1. Introduction Income inequality has grown significantly during this past decades and this phenomenon continues to increase over the years. This problem is constantly discussed in the daily news all around the world. Several consequences of this increase of inequality between people leads to economic problems such as high unemployment rates, lack of work for young people, fall of demand for certain product. The gap between rich and poor is increasing, the rich are richer and the poor are poorer as a result politicians and economists try to adopt certain policies in order to reduce this gap.
With a fall in tax revenue, the nation’s income as a whole is reduced, which decreases the amount of money in circulation, increasing the United State’s federal debt. Also, government pays for the welfare programs, so if there are more unemployed people, that means more money from government to support those
Inflation is the rate at which the general level of prices for goods and services is rising, and, then purchasing power falling over a period of time. When price level rises, dollar buys fewer goods and services. Therefore, inflation results in loss of value of money. Inflation is divided into two categories Cost-push and Demand pull inflation: Cost-push inflation means that prices have been hiked up by increases in costs of any of the four factors of production such as (labor, capital, land or entrepreneurship) when companies are already running at maximum production capability. With higher production costs and productivity at it maximum, companies cannot maintain profits by producing the same amounts of goods and services.
The 1920’s in America was an incredibly prosperous time for the nation. America saw drastic economic, political, and cultural change in an age known as “The roaring twenties”. Rapid industrial growth and production, matched by increased consumer demand saw the nation's total wealth double in total from 1920-1929. By 1930, this prosperity had run out and severe economic problems struck the nation. The economy plummeted and everyone felt the effects of it .The severe downfall of the American economy in the 1930’s known as the Great Depression was the result of speculation and installment buying, income maldistribution, and overproduction throughout America.
This law increased custom duties by nearly 50% on imports of more than 20,000 types of goods. Many countries, as a retaliatory measure, also increased their import taxes. As a result, world trade fell sharply, which contributed to exacerbating the Great Depression. With overproduction still occurring, this international standstill only made to intensify the already critical situation. The tariff also increased living costs, limit exports and hurt investors as the high tariffs would make it harder for debtors to pay off loans, continuing to weaken banks.
DISADVANTAGES Long term financial development puts an awful effect on the inhabitants of any nation. Long term economic developments may be identified with expansion, as inflations may increase. Inflations usually increase the cost of products on sale, and as the costs are higher, it will be an issue to the nationality in question to be able to buy their needs There is a limited amount of time involved in the growth of an economy as it involves an increase in GDP. The hypothesis and practice are both diverse. The hypothesis is the thing that economists are able to figure out for themselves; however, to be able to use the hypothesis in reality is the main task.
After the first war Britain switched their money over to the “Gold Exchange”, which did not help them economically. While making this switch, they also overvalued the pound at 1-4.86 (U.S. dollar). The U.S. in turn reduces its interest (5). Jumping past the roaring 20s, the “depression” hits and the government sets up many different policies, which exacerbate the downfall. Tariffs and wage standards are inflicted and the unemployment rate continues to soar.
Cost-push inflation happens when we face higher prices due to the increase in cost of production and higher costs of raw materials. It is determined by supply side factors. Cost-push inflation can be caused by higher price of commodities, imported inflation, higher wages, higher taxes and higher food prices (Economics Help, 2011). Demand-pull inflation happens when there is an increase in the price of goods and services when demand increases too much that it outpaces supply (US Economy, 2015). Sometimes people refer it as “too much money chasing too few goods”.
A more detrimental impact on the current minimum wage in our economy is the inflation rates and the fact that inflation tends to reduce the populations purchasing power of money. According to input by McConnell, Brue, and Flynn, inflation is caused by an excess of total spending that exceeds a firm’s production volume (McConnell Pg 206). In other words, by raising the minimum wage and creating human stimulus, businesses can reach full employment and maximum output. Minimum wage affects inflation because inflation imposes a domino effect in overall economic health and success. Increased costs reduce supply resulting in less total output and employment cuts.