Inflation and the Function of Money Readers Qu. Medium of Exchange - used for buying and selling goods. We value goods and wealth through money.
Essay on the Meaning of Inflation: Inflation and unemployment are the two most talked-about words in the contemporary society. These two are the big problems that plague all the economies. Almost everyone is sure that he knows what inflation exactly is, but it remains a source of great deal of confusion because it is difficult to define it unambiguously.
Inflation is often defined in terms of its supposed causes. Inflation exists when money supply exceeds available goods and services.
Or inflation is attributed to budget deficit financing. A deficit budget may be financed by additional money creation. But the situation of monetary expansion or budget deficit may not cause price level to rise.
In other words, inflation is a state of rising price level, but not rise in the price level. It is not high prices but rising prices that constitute inflation. It is an increase in the overall price level.
A small rise in prices or a sudden rise in prices is not inflation since these may reflect the short term workings of the market. It is to be pointed out here that inflation is a state of disequilibrium when there occurs a sustained rise in price level.
It is inflation if the prices of most goods go up. However, it is difficult to detect whether there is an upward trend in prices and whether this trend is sustained. That is why inflation is difficult to define in an unambiguous sense. Suppose, in Decemberthe consumer price index was Thus the inflation rate during the last one year was As inflation is a state of rising prices, deflation may be defined as a state of falling prices but not fall in prices.
Deflation is, thus, the opposite of inflation, i. Disinflation is a slowing down of the rate of inflation.
Essay on the Types of Inflation: As the nature of inflation is not uniform in an economy for all the time, it is wise to distinguish between different types of inflation.
Such analysis is useful to study the distributional and other effects of inflation as well as to recommend anti-inflationary policies. Inflation may be caused by a variety of factors. Its intensity or pace may be different at different times.
It may also be classified in accordance with the reactions of the government toward inflation. Thus, one may observe different types of inflation in the contemporary society: This type of inflation is caused by the printing of currency notes.
Being profit-making institutions, commercial banks sanction more loans and advances to the public than what the economy needs. Such credit expansion leads to a rise in price level. The budget of the government reflects a deficit when expenditure exceeds revenue.
To meet this gap, the government may ask the central bank to print additional money. Since pumping of additional money is required to meet the budget deficit, any price rise may be called deficit-induced inflation.
An increase in aggregate demand over the available output leads to a rise in the price level. Such inflation is called demand-pull inflation henceforth DPI. But why does aggregate demand rise? Classical economists attribute this rise in aggregate demand to money supply. If the supply of money in an economy exceeds the available goods and services, DPI appears.Inflation and the Function of Money Readers Qu.
EXPLAIN HOW INFLATION AFFECTS THE FUNCTIONS OF MONEY Money is said to have four functions 1. Medium of Exchange - used for buying and selling goods.
2. Store of Value: We value goods and wealth through money. Money makes it . As inflation is a state of rising prices, deflation may be defined as a state of falling prices but not fall in prices.
Deflation is, thus, the opposite of inflation, i.e., rise in the value or purchasing power of money.
Because inflation affects everything. Inflation Begins With Money Losing Value.
To understand the effects of inflation, consider the following example of the purchasing power of $ in , compared to today. Inflation Transfers Money From Savers and Investors to Debtors.
Inflation adversely affects the function of money. With higher prices, money loses its value thus it can no longer act as a medium of exchange.
The transactionary demand for money falls. Inflation however affects many thing one being function of money such as medium of exchange, store of value, unit of account and standard of deferred payments. Medium of exchange means that any item that is widely acceptable in exchange of goods and services.
How Inflation Affects Function of Money Essay Inflation is defined as a persistent increase in general price level. Inflation is measured by the proportional changes over time in some appropriate price index, commonly a consumer price index.