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Meaning of Inflation

Inflation refers to the situation where there is appreciable but persistent increase in pricing and may lead to a reduction in the purchasing power of the disposable income. Too much money will fetch very few goods whenever inflation occurs in the economy. Inflation is an irreversible and self-perpetuating upward movement in the prices of goods and services that comes from excess demand that is over the supply capacity. Sustainable inflation takes place when the overall level of pricing keeps on rising over an extended period.

Relationship Between Interest Rates and Inflation

Irwing Fisher put forward the nominal interest and inflation theory that states the tendency of nominal interest rates and inflation to move hand in hand. This condition is expressed by the equation

Real rate of interest = nominal rate of interest – rate of inflation (r = i - π)

When the adjustment process takes place in the short run, we can modify this equation to (i = r + π). This implies that the changes in the expected inflation rate and changes in real interest rate are reflected in nominal rate. The nominal interest rate in the long run increases by the same amount as inflation and growth in money.

The Negative Effects of Inflation

Unpredictable or high inflation rates have adverse effects to the economy as a whole. They result to inefficiencies in the market and people find it very hard to plan or budget in the long term. The uncertainty that occurs with regard to the future purchasing power of ends up discouraging saving and investment. Inflation also imposes a rise in hidden tax. For instance, tax payers are pushed into a higher income tax bracket due to their inflated earnings.

High levels of inflation lead to the redistribution of the purchasing power of fixed nominal income. For instance, some pensioners have a fixed level of income regardless of the levels of inflation towards individuals who have variable incomes and those whose income increases with an increasing inflation rate.

Cost Push Inflation

High inflation rates may make employees to demand to demand for an increase in wages more often in order to maintain the increase in consumer prices. The cost push theory of inflation assert that rising wages lead to an increase in consumer prices. Growth in wages has a direct relationship with inflation expectations as a collective bargaining and growth in wages increases with growth in inflation.

Hoarding

Hoarding refers to the process of individuals buying non-perishable and durable commodities as a way of storing wealth. This will assist them to avoid the expected loss due to the decline in purchasing power of disposable income that results from inflation which in turn creates a shortage in goods.

Social Unrest

People get a lot of distress from rising inflation and this evokes a massive revolution and demonstration.

Hyperinflation

Hyperinflation results from a crisis in the budget. It may primarily result from civil wars, economic and social unrest among others. Increasing and high inflation interferes significantly with the natural working of the economy and bruises its ability to supply both goods and services.

Shoe Leather Cost

Shoe leather cost simply refers to the cost that a person incurs while holding cash instead of depositing the amount in the bank so that it can earn interest on assets that bear interest. People incur this cost with a rise in the rates of inflation due to increasing nominal interest rate and you will lose the interest-bearing assets when you choose to withhold them. You will always need cash to carry out your daily transactions and the person will make several trips to the bank to make some withdrawals and this makes you wearing out the ‘leather shoe’ with each trip.

Menu Cost

Firms change their pricing for various commodities that people use on a daily basis with high inflation for them to cope up to cope up with the broad economic changes that occur often. Frequent changing of prices is tedious and very costly because the entity has to print new menus, or put in extra effort and time that is required to constantly change the prices.

Relative Price Variability

Organizations that exhibit menu cost don’t change their prices often. The implication of an increased inflation rate is high variations in the relative pricing of goods and services. These variations in relative pricing imposes an additional cost that leads to microeconomic inefficiencies in the process of allocating resources.

Tax Distortion

Most taxation provisions don’t put inflation in mind and this affects the economy. Inflations changes that tax liability of an individual because the tax code does not measure real income but nominal income. Therefore, inflation destroys the process of imposing taxes on the population.

The Positive Impacts of Inflation

Famous economists such as George L. Perry, William T. Dickens, George A. Akerlof and James Tobin argue that a small increase in the rate of inflation is healthy for the economy. The occurrence of nominal wage is a rare one because workers don’t like it.

Therefore, the best thing to do next is raise the wages a bit with the level of increase in inflation so that both the economy and the workers can benefit. This will assist to lower the rate of unemployment and achieve economic efficiency.

Inflation and its effects is a very broad topic and is complex to study and comprehend in the general sense. It has several kinds and pertaining effects on the whole economy and the student has to do a detailed study before he can write any assignment, attempt any question, or prepare for his exam. The good thing with ezassignmenthelp.com is that we have the best online inflation homework help. Our experts are at your disposal and there is no need to ask who will do my inflation homework yet you have the answer with you. We offer high-quality inflation assignment help at a cheap price especially when dealing with students. We will meet all the required deadlines and make sure that you score a good grade. Our tutors also offer excellent online courses that you can enroll. The company believes in providing services that exceed the expectation of our clients. We have a lot of dedication while serving our clients to be able to deliver satisfying and good work. We provide the right answer to anyone who is asking who will do my inflation assignment. Your homework should no longer worry you because we offer the best inflation assignment help in the market.

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