Summary
How does Inflation affect the economy summary.
- Course
- Economics
- Institution
- 10th Grade
This document summarizes how Inflation affects a countries economy.
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INFLATION:How does it affect the economy:
Inflation can have many different effects on the economy, with some being a positive impact
and some being a negative impact. These are some of the few impacts on the economy that
is caused by inflation.
REDUCED PURCHASING POWER: Inflation causes they value of money to decrease over time,
causing the currency to be able to buy less goods and services. This reduces the purchasing
power of the consumers, leading to a decrease in the standard of living and less economic
growth.
Inflation can also cause an INCREASE IN COSTS: This increases costs for businesses, which
reduces their profits and makes them less likely to employ more people, which could
increases the unemployment rate.
It also encourages SPENDING AND BORROWING: Inflation could encourage people to spend
and borrow money more, as the value of their currency decreases over time. This will
increase the economic growth but will lead to an increase in national debt and financial
uncertainty.
INCREASED INTERST RATES: This is another big factor that is usually cause by inflation. When
inflation increases the banks may increase the interest rates to counter the inflation rates.
This can increase the amount of borrowing due to the increase in the interest rates and
decrease the growth of the economy.
And the last major affect that inflation has on the economy is its affect on the
INTERNATIONAL TRADE: Higher interest rates could lead to a weaker currency, which would
makes exports cheaper but imports more expensive. This will make changes in the countries
balance of trades and effect the overall economic performance levels.
How does the government manage inflation?
There are two main Policies in which the Government implement to control the rate of
inflation and control the economy.
The Government use several tactics to control inflation and the stability of the economy.
Some methods include the Monetary policy: Central banks, which are usually apart of the
economy, use Monetary policies to manage inflation by controlling and adjusting the money
supply in the economy. They do this by adjust the interest rates by making them higher or
lower, changing the reserve requirements in banks or buying and selling Government
securities.
Another way that they can manage inflation is through the Fiscal Policy: The Fiscal Policy
manages inflation by adjusting the spending and taxation levels. For example, the
Government could increase taxes to reduce the demand in the economy and control
inflation.
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