Causes And Effect Of Inflation
EFFECTS OF DEFLATION
INTRODUCTION
Deflation is a reduction in the quantity of available money or credit in an economy that causes the price to move downwards. Inflation, on the other hand, it is a continuum; increase in the cost of commodities and services.
SHOE-LEATHER COST
Shoe leather cost is the cost of time and effort i.e. the opportunity cost of time and energy, that people disburse trying to dodge the effects of inflation. For example; holding low volumes of cash and having to visit the bank more often. The term emanates from the fact that there is more walking required to visit the bank, withdraw cash and disburse it, thus wearing out shoes more quickly. In a duration of high inflation, people are discouraged to withhold large amounts of money because its value worsens quickly relative to the rising costs in the economy.
Thus, people tend to withhold most of their cash in a bank account and keep only very small amounts of cash with them. This forces them to make frequent trips to the bank to withdraw money to pay for commodities and services. These frequent trips wear out the shoe-leather, hence producing a ‘shoe-leather cost’.
The shoe-leather cost is now used more generally to describe all the costs associated with having to hold small amounts of cash.
Deflation would be well if people would not bear to make endless trips to their bank in order to take out money. Besides, since deflation will lead to a decrease in the amount of the total available money, people
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