Difference Between Inflation And Inflation

2377 Words5 Pages
bulb-icon

Recommended: EFFECTS OF inflation in the economy ESSAY

INFLATION
1. Inflation happens in an economy when there is a rise of level of goods and services, due to an increase in the volume of money in an economy over a period of time. It is also referred to as an (erosion) in the value of an economy’s currency. When inflation is high, it affects the entire economy. Consumers are not able to afford the goods and services because of the high prices. Additionally, when the price level of goods and services increase, the value of currency reduces. Meaning, that each unit of currency buys fewer goods and services.

2. The different types of inflation are:
 Demand pull inflation – This occurs when there is a high result of consumer demand. The prices increase for the same goods and services, when consumers are trying …show more content…

Deflation- A general decline in prices, often caused by reduction in the supply of money or credit. Also, it can be because of a decrease in investment, government and personal spending. This is the opposite of Inflation. (A fall in the general price level).
Disinflation – The process of reversing inflation without creating unemployment or reducing the output in the economy. It is a deliberate attempt to counter a highly inflationary situation. (A decrease in the rate of inflation).
Nevertheless, the differences between reflation and stagflation are because reflation is a rise in the rate of inflation while the prices were not rising and stagflation is more serious, when the economy becomes stagnant, but still experiences inflation. In addition, the differences between deflation and disinflation are that deflation can be both manmade and natural. Disinflation is always planned and is based on the government policy. Deflation always emerges in the form of depression and disinflation price level comes to normal

Show More
Related

  • Dinner Party Economics Summary

    1243 Words  | 3 Pages

    But as we know, there is always going to be one or the other. The reason that an economy is thrown out of equilibrium in the first place is a result of consumer spending habits. If these habits are changed, there is a result is one of two things. If consumers increase there spending habits, an inflationary gap occurs. At the opposite end of the spectrum, if consumers were to reduce their spending, the result is a recessionary gap. Inflation occurs when the economy is growing uncontrollably fast as a result of consumer spending. This rapid rate of inflation happens when consumers are spending money due to increases in income. When consumers spend more, this increases the overall price level, which therefore leads to a further increase in income. This cycle is what leads to over-inflation. One of two things can be done when an economy is experiencing an economic gap, whether it is above or below the trend line. Option one is to do nothing about it and let the problem work itself out. The problem with this method is that in order for a recession to work itself out without government assistance, this requires that workers take pay cuts – something that a very low percentage of people are accepting of simply due to the personal

    Read More

  • The Pros And Cons Of Macropoland

    719 Words  | 2 Pages

    ...ts profit. This causes an increase in unemployment. Deflation also affects loans. When deflation occurs, borrowers are paying back loans in dollars that are worth less than expected. So one’s income may decrease, but the size of their loan stays the same, making it more difficult to pay off.

    Read More

  • Weimar Hyperinflation

    2077 Words  | 5 Pages

    Hyperinflation is an economic condition characterized by “a rapid increase in the overall price level that continues over a significant period” and in this period the concept of inflation is essentially rendered meaningless (Kroon 90). The post-World War I German economy experienced a crippling period of hyperinflation which lasted nearly two years and had an enormous impact on the economy. The hyperinflation began inconspicuously as the inflation rate crept just a percent or two per year during the war years. In the post-war period inflation began to rise and in early- to mid-1922, inflation raged. During this period, businesses reached full operational capacity and unemployment nearly disappeared. While nominal wages increased, real wages dropped precipitously. Workers were paid two or three times a day, and they rushed home to pass the money to family members who could go and exchange the rapidly depreciating currency for real goods (clothing, food, etc.) before it became completely worthless. Prices rose so rapidly pe...

    Read More

  • Differences Between Inflation And Deflation

    1638 Words  | 4 Pages

    Inflation is the increase in the overall level of prices in the economy and deflation is just the opposite. When there is inflation, it is resulted from too much money being circulated in the economy, causing prices to hike. On the other hand, deflation is caused by the decrease in the money supply, causing decreases in prices in the long run. Inflation is a trend that we have seen more recently in the United States, but there have also been times of deflation. Inflation and deflation affect multiple groups of the economy in different ways with each situation. Both of these situations have costs for consumers and producers. Being in one situation may cause incomes and employment to fall. There is a concern with both inflation and deflation because there are

    Read More

  • Economics: Demand and Quantity Demanded

    1410 Words  | 3 Pages

    The law of demand states that if everything remains constant (ceteris paribus) when the price is high the lower the quantity demanded. A demand curve displays quantity demanded as the independent variable (the x-axis) and the price as the dependent variable (the y-axis). http://www.netmba.com/econ/micro/demand/curve/

    Read More

  • Stagflation Case Study

    715 Words  | 2 Pages

    As stagflation is a mixture of three factors, each should be discussed separately in order to understand whether a country is or is not going through stagflation. The first factor which is one of the main causes of stagflation is inflation as said above inflation is a stable rate of increasing prices accompanied by a fall in the real value of money or when real GDP is less than potential GDP. GDP is the total value of everything goods and services produced in our economy. As stagflation is a mixture of three different economic problems, so its consequences are a mixture of all too.

    Read More

  • Fixed Costs Case Study

    1289 Words  | 3 Pages

    This is demand pull inflation, in this case the real output (real GDP) increases. It is caused by continuing rises in aggregate demand. Generally, it occurs when aggregate demand for goods and services in an economy rises more rapidly than an economy’s productive capacity. One potential shock to aggregate demand might come from a central bank that rapidly increases the supply of money. The increase in money in the economy will increase demand for goods and services from D0 to D1. In the short run, businesses cannot significantly increase production and supply (S) remains constant. The economy’s equilibrium moves from point A to point B and prices will tend to rise, resulting in

    Read More

  • The Effects of Government Spending and Borrowing

    820 Words  | 2 Pages

    Inflation also creates uncertainty for entrepreneurs, cost curves increase and revenue can decrease thus squeezing profits. Also when inflation is in the mind of the entrepreneur it can escalate easily as they will take inflationary actions like automatically increase prices and therefore it is imperative government spending/borrowing is controlled. Although government borrowing does increase the money supply, the monetarist view of a direct link between money supply and inflation is wrong, as proved when Britain experienced recession under Margaret Thatcher. In order to control the money supply the government cut borrowing and spending, which in theory would reduce the money supply, inflation and unemployment but interest rates had to rise to stop consumer borrowing, which in turn increased the exchange rate. High interest rates curbed consumer borrowing, which reduces demand for products, along with a high exchange rate ruining demand for exports ... ...

    Read More

  • Interest Rates On The Economy

    1462 Words  | 3 Pages

    ...two aspects, nominal and real, both measuring two different controls. Nominal measures what is considered a “price tag” of a loan, which includes the price of inflation. While real measures the cost of a loan without inflationary rates. From nominal and real rates there are also lowered and raised rates. When the interest rate is lowered consumer spending grows while savings decrease. Spending on items such as housing becomes one of the ways the AD rises. Though AD rises it pulls the economy out lack of spending, but puts the economy into the possibility of inflation. Differentiating from low rates, high rates stop inflation but creates the possibility of recession. High interest rates create a fall in demand for goods and services. This fall of AD puts a stop to spending, borrowing and much more, creating the incentive to save ultimately putting a haul to inflation.

    Read More

  • Effects of Rising Gas Prices

    414 Words  | 1 Pages

    Second, inflation prices are going up, because of the gas prices high it effected everything a round from goods and services. Goods and services depend on gas for transportation and moving the goods from place to another. Services are going up due to higher cost of the gas. People are cutting back in the necessity like food, health insurance, and shopping. Many people have steady income and cannot effort much higher cost of anything.

    Read More

  • Relationship Between Inflation and Unemployment

    1860 Words  | 4 Pages

    But before we start, it is worth getting a better understanding of the terms, inflation and unemployment. Inflation refers to an increase in the overall level of prices within an economy. In simple words, it means you have to pay more money to get the same amount of goods or services as you acquired before. By contrast, the term unemployment is easier to understand. Generally, it refers to those people who are available for work but do not find work.

    Read More

  • Causes Of Inflation Essay

    1416 Words  | 3 Pages

    Inflation is defined as an increase in the expected price level and has been the signal for an improving economy, but it has also weakened an economy due to the unemployment it usually produces which usually hurts the Middle class the most. A healthy rate of inflation means an expanding economy due to higher tax revenues for the government and higher wages for businesses that are booming due to the high demand of their products. But if inflation surpasses of what is expected than employer will have to reduce wages to meet these new prices. When the Federal Reserve creates inflation most argue that this is robbing people of the money that they have saved because they have to use it due to the rise in prices. Printing

    Read More

  • Rising Inflation in the UK

    1391 Words  | 3 Pages

    In an economy, aggregate demand (AD) accounts for the total expenditure on goods and services. It has five constituents; Consumer expenditure (C), Investment expenditure (I), Government expenditure (G), Export expenditure (X) and import expenditure (M), This gives us: AD= C+I+G+X-M. Aggregate supply (AS) on the other hand is the total supply of goods and services in the economy. Increasing AD and decreasing AS both cause demand-pull and cost-push inflation respectively. Demand pull inflation occurs when aggregate demand (AD) continuously rises, detailed in Figure 1. The AD curve continuously shifts to the right, as demand continuously increases, from point a to b to c. This consequently causes an increase in the price level of goods and services. As prices rise, costs of production also increase, causing producers to reduce output (a decrease in aggregate supply (AS)), shifting the AS curve to the left and leading to yet another increase in prices, (t...

    Read More

  • Inflation And Inflation Essay

    1766 Words  | 4 Pages

    Inflation is the rate at which the purchasing power of currency is falling, consequently, the general level of prices for goods and services is rising. Central banks endeavor to point of confinement inflation, and maintain a strategic distance from collapse i.e. deflation, with a specific end goal to keep the economy running smoothly.

    Read More

  • Effects Of Inflation Essay

    1615 Words  | 4 Pages

    Inflation is one of the most important economic issues in the world. It can be defined as the price of goods and services rising over monthly or yearly. Inflation leads to a decline in the value of money, it means that we cannot buy something at a price that same as before. This situation will increase our cost of living.

    Read More

More about Difference Between Inflation And Inflation

Open Document