Because people can live better rather than suffering when the economy is decline or which will lead to scarcity problems. These problem comprise inflation in general price level of goods when it rise that will easily leads to fall in purchasing power and in currency value. On this case inflation and economic growth are related terms with a common contention relationship, because there is a positive and important link and as well negative ones between inflation and economic growth. Thus, high inflation is extremely affect the economy in terms of bad performance, because high inflation cause a lot of issues such as it can decrease the purchasing power of the dollar and increase wages which will lead the numerous people’ income become less sufficient to them and cannot afford to satisfy their need and wants, and it cause transaction movement in the market become slow and shortage of necessity products and services, and when high inflation affect price level is giving a hard time, a very complicated situation that can make hardly to forecast future market behavior precisely. This condition is also lead up to business investment become slows.
Inflation has adverse effects on an economy. For instance, due to uncertainty of the future, people may decide not to invest and save money. High rates of inflation can also lead to shortage of goods since consumers might start hoarding in fear that the prices might increase further in future. Research conducted by economists’ shows that high rates of inflation are mainly caused by an excessive growth of the money supply and monetary authorities have an obligation to keep inflation rates low. Background Pakistan is one of the countries that currently faces high inflation rates.
Inflation is one of the major problems in macroeconomics. Generally in theory, inflation is an increase in the overall price level and it is calculated based on the Consumer Price Index (CPI). Inflation and economic growth are incompatible. Government around the world will take action to minimize the negative impact of inflation to a certain extent when inflation is expected to be happened. Low inflation rate and upward economic growth is impossible in reality (“Inflation and Economic Growth”, 2010).
On the contrary, if a country’s currency depreciates then it leaves an impact on the imports of the country, making it more expensive. Hence, the demand for the exports increases which results in Demand-Pull Inflation which arises due to the condition where the demand of goods is more than its supply and increase in demand leads to increase in price of good because supply is the limiting factor. This is how inflation and exchange rate affect each other. Both Exchange Rate and Inflation play a crucial role in every economy, that’s why it is necessary to study the impact of both on the stock
Inflation is most often perceived as the upward persistent rise in c CPI. Alternatively, a generally persistent fall in general price level is termed “deflation”. A stable low rate of inflation enables households to make sound judgements about the consumption-savings patterns. When inflation rate experiences undulating features, periods of high inflation, holding income and other factors constant, induces households to spend more of their income just to maintain same previous utility from consumption. Also, high levels of inflation raise the opportunity cost of holding money balances, in so doing savings reduces (Miller and Benjamin, 2008).
The first and foremost aim of the Central Bank is to maintain the inflation level to the minimum. The Quantitative Easing policy is differing and very inflationary since it uses money for both lending and keeping as reserves. Nevertheless the economic policy on the other hand states that the effect of inflation will be good when Quantitative Easing is used, when the economy goes down as it will encourage the economy as a whole initially. But it will create problems in the longer run as the effects of such a simulation will be an extreme challenge to deal with when the economy gradually recovers. Secondly, quantitative easing can lead to a fall in the interest rates in the short term and an increase in the rate of inflation in the longer run, hence causing an instability in the financial system as well as an increase in the interest rates, therefore it is essential for the central banks to keep the interest rates
Figure 2.0 Causes of Inflation Some of the causes of inflations are: i. Demand-Pull inflation. This occurs when the goods supplied is insufficient to meet the aggregate demand for the society. So due this society compete for the available goods, which leads to increase in prices for goods. ii. Cost-push inflation.
INFLATION Submitted to Prof. Zeshan Ahmer Partyyyyyyyycipants Tables for life preface Introduction What is Inflation? Inflation is the rate at which the cost of goods and services rises over time. When inflation rises, the value of the money goes down because consumers aren't able to buy as much as they previously could with that same money. (Brooks) Increase in the price level of goods and services in a specific economy over a period of time is Inflation. The monetary value or real value of a currency falls because of the increase in prices.
The price will raise when a government prints too much money, because the money loses some its value. To make up this loss of money the government or even businesses will raise prices. This is called inflation in the economic world. 10. How does the economy affect your personal
Inflation is also an ill for the growth of an economy. While looking at the relationship, the writers had to be also looking into other variables such as investment and capital formation of the economy. Throughout the study, the movement of inflation and economic growth, fact concrete conclusion is inverse relationship can be easily inferred. During the 1970s (in this period) inflation and economic growth had positive relationship, after this period the rates started to be high later the studies conclude it to be a negative relationship. Similarly, there is a structural breakeven point effect positive when inflation in 2%, breakeven when inflation rate equals 2% and negative when more than 2%.