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Consequences of Inflation

  • Date Submitted: 02/17/2013 08:34 AM
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Consequences of inflation
Inflation occurs when there is a sustained increase in the general level of prices and the purchasing power of money falls correspondingly. The government tries to control inflation as it is a major aim in their policies. For example, in the UK the government targets inflation at 2% per year and not zero inflation. Although hard to believe, inflation is actually beneficial for the economy overall and outweighs the costs. This happens only when the inflation rate is at low levels (approximately 2%-5 %.)
To begin with, a positive aspect of inflation is that a low rate increase in price levels allows greater flexibility in a growing economy and it also helps prices to adjust, especially the price of labour- wages. In addition, a low inflation rate could become an incentive to a business to invest as their prices & profits would increase. Furthermore, debtors gain in times of inflation, since the real value of their debts goes down. Moreover, home owners find that the value of their house rises in times of inflation and thus feel that they are wealthier. In addition, consumers find it more easy to plan their   spending ahead of time since they can predict the prices in the next weeks and months, allowing them to save a fixed amount of money every month and use it after some time to buy an expensive good, in the price they knew a long time ago.
On the other hand, while some people get better off others become worse off at times of inflation.   As a result the difference in income between various groups of the population may change. This is called income redistribution and the gap between rich and poor may change. In simple words, the rich will become richer while the poor, poorer.   For example, people on fixed income suffer, because their real incomes fall if the income remains the same or does not rise with inflation. Another example is that debtors gain and creditors lose money during inflation. If someone borrows 100€ at a 5% interest and...


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