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Inflation And Economic Growth Essay

1207 Words5 Pages

The relationship between inflation and economic growth has been one of the most important issue since the beginning. By inflation, we mean a gradual increase in the level of price of goods and services over a period of time. When inflation increases, purchasing power of money decreases, cost of living also the cost of borrowing increases. All these causes the economic growth to decrease. However, if cost of borrowing decreases, this means investors will take more loans which will lead to higher investment, which also means labors will have more wages, (higher disposable income) and this in turn will increase consumption hence GDP will increase which will lead to economic growth. On the other hand, higher consumption means people will demand more which will lead to an increase in the price of goods and services. Therefore, the question is can lower inflation and higher economic growth coexist? This paper will talk about the relation between inflation and economic growth and whether these two factors are positively correlated or negatively correlated with each other.
Global economy faced three types of inflation. The falling interest rates in the 1970s increased the aggregate demand which in turn increased the prices of goods. Prices were increased further after the oil price shock of 1973 which again boosted inflation and effected the industrial countries, more specifically developing countries. Mixture of monetary, trade and fiscal measure was used by the effected countries

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