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The Importance Of Inflation

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Inflation in general is said as a growth rate yearly in the consumer price index whereby is a increase in the prices. A person can also measure the inflation by producer and a wholesale price. A loss of purchasing power for the consumer is what an inflation meant, unless it is parallel with the increase in wages. The more components of the money needed over a period time in order to get more goods by buying, the value of the country’s currency is reduced. It could damage the output of economy over the time due to the customers becoming more vigilant with their spending. Banks always have to adjust their and it is a struggle. This is to compensate for the inflation and thus allowing them to spend less. Money becomes valueless, in other words, they would not be able to afford more especially those on fixed incomes. Besides that, their standard of living also drops. Price have to keep up the momentum that changes and products that are produced at home find it difficult to compete with the imports. Thus, scarcity is formed when consumers hold onto tangible asset as the currency value declines. Deflation is the complete opposite of inflation. It is constant drop in the prices …show more content…

Debt will become more attractive in an inflationary environment, based on the liability side of the balance sheet. Allocating a longer-term fixed-rate is something business should mainly consider in regards to whose real interest rate will decrease as the inflation increases and increase their leverage. In depreciating currencies borrowing while having their financial assets in appreciating currencies, as for multinational firms, will be a way to further weight the balance sheet in an inflationary environment. It is advantageous especially for businesses producing for global demand and the reason being stated as advantageous is having assets in countries with depreciating currencies and higher

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