Essay on Inflation: Types, Causes and Effects
Essay on Inflation!
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. Hence the difficulty of defining ‘inflation’ .
Inflation may be defined as ‘a sustained upward trend in the general level of prices’ and not the price of only one or two goods. G. Ackley defined inflation as ‘a persistent and appreciable rise in the general level or average of prices’ . 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.
Let’s measure inflation rate. Suppose, in December 2007, the consumer price index was 193.6 and, in December 2008 it was 223.8. Thus the inflation rate during the last one year was 223.8 – 193.6/193.6 × 100 = 15.6%.
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. 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:
(a) According to Causes:
i. Currency Inflation:
This type of inflation is caused by the printing of currency notes.
ii. Credit Inflation:
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.
iii. Deficit-Induced Inflation:
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.
iv. Demand-Pull 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. It has been described by Coulborn as a situation of “too much money chasing too few goods” .
Note that, in this region, price level begins to rise. Ultimately, the economy reaches full employment situation, i.e., Range 3, where output does not rise but price level is pulled upward. This is demand-pull inflation. The essence of this type of inflation is “too much spending chasing too few goods.”
v. Cost-Push Inflation:
Inflation in an economy may arise from the overall increase in the cost of production. This type of inflation is known as cost-push inflation (henceforth CPI). Cost of production may rise due to increase in the price of raw materials, wages, etc. Often trade unions are blamed for wage rise since wage rate is not market-determined. Higher wage means higher cost of production.
Prices of commodities are thereby increased. A wage-price spiral comes into operation. But, at the same time, firms are to be blamed also for the price rise since they simply raise prices to expand their profit margins. Thus we have two important variants of CPI: wage-push inflation and profit-push inflation. Anyway, CPI stems from the leftward shift of the aggregate supply curve.
The price level thus determined is OP 1 . As aggregate demand curve shifts to AD 2 , price level rises to OP 2 . Thus, an increase in aggregate demand at the full employment stage leads to an increase in price level only, rather than the level of output. However, how much price level will rise following an increase in aggregate demand depends on the slope of the AS curve.
Causes of Demand-Pull Inflation :
DPI originates in the monetary sector. Monetarists’ argument that “only money matters” is based on the assumption that at or near full employment, excessive money supply will increase aggregate demand and will thus cause inflation.
An increase in nominal money supply shifts aggregate demand curve rightward. This enables people to hold excess cash balances. Spending of excess cash balances by them causes price level to rise. Price level will continue to rise until aggregate demand equals aggregate supply.
Keynesians argue that inflation originates in the non-monetary sector or the real sector. Aggregate demand may rise if there is an increase in consumption expenditure following a tax cut. There may be an autonomous increase in business investment or government expenditure. Governmental expenditure is inflationary if the needed money is procured by the government by printing additional money.
In brief, an increase in aggregate demand i.e., increase in (C + I + G + X – M) causes price level to rise. However, aggregate demand may rise following an increase in money supply generated by the printing of additional money (classical argument) which drives prices upward. Thus, money plays a vital role. That is why Milton Friedman believes that inflation is always and everywhere a monetary phenomenon.
There are other reasons that may push aggregate demand and, hence, price level upwards. For instance, growth of population stimulates aggregate demand. Higher export earnings increase the purchasing power of the exporting countries.
Additional purchasing power means additional aggregate demand. Purchasing power and, hence, aggregate demand, may also go up if government repays public debt. Again, there is a tendency on the part of the holders of black money to spend on conspicuous consumption goods. Such tendency fuels inflationary fire. Thus, DPI is caused by a variety of factors.
Cost-Push Inflation Theory :
In addition to aggregate demand, aggregate supply also generates inflationary process. As inflation is caused by a leftward shift of the aggregate supply, we call it CPI. CPI is usually associated with the non-monetary factors. CPI arises due to the increase in cost of production. Cost of production may rise due to a rise in the cost of raw materials or increase in wages.
Such increases in costs are passed on to consumers by firms by raising the prices of the products. Rising wages lead to rising costs. Rising costs lead to rising prices. And rising prices, again, prompt trade unions to demand higher wages. Thus, an inflationary wage-price spiral starts.
This causes aggregate supply curve to shift leftward. This can be demonstrated graphically (Fig. 11.4) where AS 1 is the initial aggregate supply curve. Below the full employment stage this AS curve is positive sloping and at full employment stage it becomes perfectly inelastic. Intersection point (E 1 ) of AD 1 and AS 1 curves determines the price level.
Now, there is a leftward shift of aggregate supply curve to AS 2 . With no change in aggregate demand, this causes price level to rise to OP 2 and output to fall to OY 2 .
With the reduction in output, employment in the economy declines or unemployment rises. Further shift in the AS curve to AS 2 results in higher price level (OP 3 ) and a lower volume of aggregate output (OY 3 ). Thus, CPI may arise even below the full employment (Y f ) stage.
Causes of CPI :
It is the cost factors that pull the prices upward. One of the important causes of price rise is the rise in price of raw materials. For instance, by an administrative order the government may hike the price of petrol or diesel or freight rate. Firms buy these inputs now at a higher price. This leads to an upward pressure on cost of production.
Not only this, CPI is often imported from outside the economy. Increase in the price of petrol by OPEC compels the government to increase the price of petrol and diesel. These two important raw materials are needed by every sector, especially the transport sector. As a result, transport costs go up resulting in higher general price level.
Again, CPI may be induced by wage-push inflation or profit-push inflation. Trade unions demand higher money wages as a compensation against inflationary price rise. If increase in money wages exceeds labour productivity, aggregate supply will shift upward and leftward. Firms often exercise power by pushing up prices independently of consumer demand to expand their profit margins.
Fiscal policy changes, such as an increase in tax rates leads to an upward pressure in cost of production. For instance, an overall increase in excise tax of mass consumption goods is definitely inflationary. That is why government is then accused of causing inflation.
Finally, production setbacks may result in decreases in output. Natural disaster, exhaustion of natural resources, work stoppages, electric power cuts, etc., may cause aggregate output to decline.
In the midst of this output reduction, artificial scarcity of any goods by traders and hoarders just simply ignite the situation.
Inefficiency, corruption, mismanagement of the economy may also be the other reasons. Thus, inflation is caused by the interplay of various factors. A particular factor cannot be held responsible for inflationary price rise.
Essay on the Effects of Inflation :
People’s desires are inconsistent. When they act as buyers they want prices of goods and services to remain stable but as sellers they expect the prices of goods and services should go up. Such a happy outcome may arise for some individuals; “but, when this happens, others will be getting the worst of both worlds.” Since inflation reduces purchasing power it is bad.
The old people are in the habit of recalling the days when the price of say, meat per kilogram cost just 10 rupees. Today it is Rs. 250 per kilogram. This is true for all other commodities. When they enjoyed a better living standard. Imagine today, how worse we are! But meanwhile, wages and salaries of people have risen to a great height, compared to the ‘good old days’. This goes unusually untold.
When price level goes up, there is both a gainer and a loser. To evaluate the consequence of inflation, one must identify the nature of inflation which may be anticipated and unanticipated. If inflation is anticipated, people can adjust with the new situation and costs of inflation to the society will be smaller.
In reality, people cannot predict accurately future events or people often make mistakes in predicting the course of inflation. In other words, inflation may be unanticipated when people fail to adjust completely. This creates various problems.
One can study the effects of unanticipated inflation under two broad headings:
(i) Effect on distribution of income and wealth
(ii) Effect on economic growth.
(a) Effects of Inflation on Income and Wealth Distribution :
During inflation, usually people experience rise in incomes. But some people gain during inflation at the expense of others. Some individuals gain because their money incomes rise more rapidly than the prices and some lose because prices rise more rapidly than their incomes during inflation. Thus, it redistributes income and wealth.
Though no conclusive evidence can be cited, it can be asserted that following categories of people are affected by inflation differently:
i. Creditors and Debtors:
Borrowers gain and lenders lose during inflation because debts are fixed in rupee terms. When debts are repaid their real value declines by the price level increase and, hence, creditors lose. An individual may be interested in buying a house by taking a loan of Rs. 7 lakh from an institution for 7 years.
The borrower now welcomes inflation since he will have to pay less in real terms than when it was borrowed. Lender, in the process, loses since the rate of interest payable remains unaltered as per agreement. Because of inflation, the borrower is given ‘dear’ rupees, but pays back ‘cheap’ rupees.
However, if in an inflation-ridden economy creditors chronically loose, it is wise not to advance loans or to shut down business. Never does it happen. Rather, the loan- giving institution makes adequate safeguard against the erosion of real value.
ii. Bond and Debenture-Holders:
In an economy, there are some people who live on interest income—they suffer most.
Bondholders earn fixed interest income:
These people suffer a reduction in real income when prices rise. In other words, the value of one’s savings decline if the interest rate falls short of inflation rate. Similarly, beneficiaries from life insurance programmes are also hit badly by inflation since real value of savings deteriorate.
People who put their money in shares during inflation are expected to gain since the possibility of earning business profit brightens. Higher profit induces owners of firms to distribute profit among investors or shareholders.
iv. Salaried People and Wage-Earners:
Anyone earning a fixed income is damaged by inflation. Sometimes, unionized worker succeeds in raising wage rates of white-collar workers as a compensation against price rise. But wage rate changes with a long time lag. In other words, wage rate increases always lag behind price increases.
Naturally, inflation results in a reduction in real purchasing power of fixed income earners. On the other hand, people earning flexible incomes may gain during inflation. The nominal incomes of such people outstrip the general price rise. As a result, real incomes of this income group increase.
v. Profit-Earners, Speculators and Black Marketeers:
It is argued that profit-earners gain from inflation. Profit tends to rise during inflation. Seeing inflation, businessmen raise the prices of their products. This results in a bigger profit. Profit margin, however, may not be high when the rate of inflation climbs to a high level.
However, speculators dealing in business in essential commodities usually stand to gain by inflation. Black marketeers are also benefited by inflation.
Thus, there occurs a redistribution of income and wealth. It is said that rich becomes richer and poor becomes poorer during inflation. However, no such hard and fast generalizations can be made. It is clear that someone wins and someone loses from inflation.
These effects of inflation may persist if inflation is unanticipated. However, the redistributive burdens of inflation on income and wealth are most likely to be minimal if inflation is anticipated by the people.
With anticipated inflation, people can build up their strategies to cope with inflation. If the annual rate of inflation in an economy is anticipated correctly people will try to protect them against losses resulting from inflation.
Workers will demand 10 p.c. wage increase if inflation is expected to rise by 10 p.c. Similarly, a percentage of inflation premium will be demanded by creditors from debtors. Business firms will also fix prices of their products in accordance with the anticipated price rise. Now if the entire society “learns to live with inflation” , the redistributive effect of inflation will be minimal.
However, it is difficult to anticipate properly every episode of inflation. Further, even if it is anticipated it cannot be perfect. In addition, adjustment with the new expected inflationary conditions may not be possible for all categories of people. Thus, adverse redistributive effects are likely to occur.
Finally, anticipated inflation may also be costly to the society. If people’s expectation regarding future price rise become stronger they will hold less liquid money. Mere holding of cash balances during inflation is unwise since its real value declines. That is why people use their money balances in buying real estate, gold, jewellery, etc.
Such investment is referred to as unproductive investment. Thus, during inflation of anticipated variety, there occurs a diversion of resources from priority to non-priority or unproductive sectors.
b. Effect on Production and Economic Growth :
Inflation may or may not result in higher output. Below the full employment stage, inflation has a favourable effect on production. In general, profit is a rising function of the price level. An inflationary situation gives an incentive to businessmen to raise prices of their products so as to earn higher doses of profit.
Rising price and rising profit encourage firms to make larger investments. As a result, the multiplier effect of investment will come into operation resulting in higher national output. However, such a favourable effect of inflation will be temporary if wages and production costs rise very rapidly.
Further, inflationary situation may be associated with the fall in output, particularly if inflation is of the cost-push variety. Thus, there is no strict relationship between prices and output. An increase in aggregate demand will increase both prices and output, but a supply shock will raise prices and lower output.
Inflation may also lower down further production levels. It is commonly assumed that if inflationary tendencies nurtured by experienced inflation persist in future, people will now save less and consume more. Rising saving propensities will result in lower further outputs.
One may also argue that inflation creates an air of uncertainty in the minds of business community, particularly when the rate of inflation fluctuates. In the midst of rising inflationary trend, firms cannot accurately estimate their costs and revenues. Under the circumstance, business firms may be deterred in investing. This will adversely affect the growth performance of the economy.
However, slight dose of inflation is necessary for economic growth. Mild inflation has an encouraging effect on national output. But it is difficult to make the price rise of a creeping variety. High rate of inflation acts as a disincentive to long run economic growth. The way the hyperinflation affects economic growth is summed up here.
We know that hyperinflation discourages savings. A fall in savings means a lower rate of capital formation. A low rate of capital formation hinders economic growth. Further, during excessive price rise, there occurs an increase in unproductive investment in real estate, gold, jewellery, etc.
Above all, speculative businesses flourish during inflation resulting in artificial scarcities and, hence, further rise in prices. Again, following hyperinflation, export earnings decline resulting in a wide imbalance in the balance of payments account.
Often, galloping inflation results in a ‘flight’ of capital to foreign countries since people lose confidence and faith over the monetary arrangements of the country, thereby resulting in a scarcity of resources. Finally, real value of tax revenue also declines under the impact of hyperinflation. Government then experiences a shortfall in investible resources.
Thus, economists and policy makers are unanimous regarding the dangers of high price rise. But the consequence of hyperinflation is disastrous. In the past, some of the world economies (e.g., Germany after the First World War (1914-1918), Latin American countries in the 1980s) had been greatly ravaged by hyperinflation.
The German Inflation of 1920s was also Catastrophic:
During 1922, the German price level went up 5,470 per cent, in 1923, the situation worsened; the German price level rose 1,300,000,000 times. By October of 1923, the postage of the lightest letter sent from Germany to the United States was 200,000 marks.
Butter cost 1.5 million marks per pound, meat 2 million marks, a loaf of bread 200,000 marks, and an egg 60,000 marks Prices increased so rapidly that waiters changed the prices on the menu several times during the course of a lunch!! Sometimes, customers had to pay double the price listed on the menu when they observed it first!!!
During October 2008, Zimbabwe, under the President-ship of Robert G. Mugabe, experienced 231,000,000 p.c. (2.31 million p.c.) as against 1.2 million p.c. price rise in September 2008—a record after 1923. It is an unbelievable rate. In May 2008, the cost of price of a toilet paper itself and not the costs of the roll of the toilet paper came to 417 Zimbabwean dollars.
Anyway, people are harassed ultimately by the high rate of inflation. That is why it is said that ‘inflation is our public enemy number one’. Rising inflation rate is a sign of failure on the part of the government.
- Essay on the Causes of Inflation (473 Words)
- Cost-Push Inflation and Demand-Pull or Mixed Inflation
- Demand Pull Inflation and Cost Push Inflation | Money
- Essay on Inflation: Meaning, Measurement and Causes
- Essay Type,
- Argumentative Essay,
- Cause And Effect Essay
- Description Essay
- Comparison Essay
- Informative Essay
- Economic Inequality
- Persuasive Essay
- Autobiography Essay
- Definition Essay
- Narrative Essay
- Descriptive Essay
Inflation Argumentative Essay (854 words)
Get original paper in 3 hours and nail the task
124 experts online
INFLATION: In the 1970s the prices of most things Americans buy more than doubled. Such a general increase in prices is called inflation. Prices of selected goods may increase for reasons unrelated to inflation: the price of fresh lettuce may rise because unseasonably heavy rainfall in California has ruined the lettuce crop, or the price of gasoline may rise if the oil-producing countries set a higher price for oil. During inflation, however, all prices tend to rise.
Over the last 400 years there have been many periods of inflation. In the 16th century, when the Spaniards began bringing back gold and silver from the New World, prices in Western Europe moved upward as the supply of money increased. During the 19th century prices tended to go downward as food and raw materials became cheaper. After major wars such as the Napoleonic Wars and World Wars I and II, prices again moved upward. In the 1950s and ’60s a so-called creeping inflation occurred, when the general price level in the United States and Western Europe rose by an average of 1 to 5 percent each year. In the 1970s inflation increased until it reached as much as 13 percent a year in the United States.
Many countries have suffered from inflation more than has the United States. Israel had inflation of more than 100 percent a year in the early 1980s, meaning that the cost of living more than doubled every year. In Argentina inflation was greater than 400 percent in 1975 and averaged more than 100 percent each year from 1976 to 1982. The most remarkable inflation in modern times was the German hyperinflation of 1923, when people went to the store with wheelbarrows full of money to buy a few groceries. A similar hyperinflation occurred in Hungary after World War II.
Inflation has been defined as “too much money chasing too few goods. ” As prices rise, wages and salaries also have a tendency to rise. More money in people’s pockets causes prices to rise still higher so that consumers never quite catch up. Inflation can go on continuously year after year so long as the money supply continues to increase. Continued inflation affects people in diverse ways.
Those who live on fixed incomes, or those whose incomes increase very slowly, suffer most from inflation because they are able to buy less and less. Those who lend money when prices are lower may be paid back in dollars of reduced purchasing power. Banks and savings and loan associations generally lose from inflation. People who borrow money, however, may profit by paying their debts in dollars that have shrunk in purchasing power. Inflation thus encourages borrowing and discourages saving. It also leads people to buy real estate and durable goods that will keep their value over time.
In the United States this tendency is reinforced by the tax system, which allows taxpayers to deduct property taxes and interest payments from their taxable incomes. If inflation continues for a long time, the country as a whole may begin to consume more and invest less as people find it more profitable to borrow than to save. In other words inflation causes society to use more of its resources for today’s purposes and to set aside less for tomorrow’s needs. Causes of Inflation:Inflation has many causes, but they all operate to raise the demand for goods and services beyond the capacity of the ecomomy to satisfy that demand.
Often inflation follows a war, when the government has spent vast sums on military equipment and has not raised taxes enough to pay for it. Heavy government spending in peacetime may also lead to inflation. The principal reason why governments create inflation is that they are able to print money. When a government pays its bills by printing money rather than by raising taxes, the effect is to increase the demand for goods and services. If demand is already high, increasing it will only push up the prices of those goods and services.
But the government may not be the only player in the inflation scenario. Citizens, through their voting power, encourage the government to follow inflationary policies. In the United States special interest groups often exert pressure on Congress for programs that will benefit them at the expense of the treasury. Few taxpayers actually ask their Congressional representatives to raise taxes.
Government deficits in themselves do not necessarily lead to inflation, but they make it more difficult to prevent inflation or to slow it down. Another part in the scenario is played by people’s efforts to protect themselves from the effects of inflation. Consumers want their incomes to increase so as to keep up with rising prices. Those who belong to unions may put pressure on employers to raise wages, a factor that tends to force up prices still further.
Those who lend money expect to be paid back in inflation-adjusted dollars. Retired people want their social security and other pension payments to increase with the cost of living. As inflation continues, people expect it to become even worse and try to compensate for it in advance. The simple expectation of inflation thus helps to keep it going.
This essay was written by a fellow student. You may use it as a guide or sample for writing your own paper, but remember to cite it correctly . Don’t submit it as your own as it will be considered plagiarism.
Need custom essay sample written special for your assignment?
Choose skilled expert on your subject and get original paper with free plagiarism report
Inflation Argumentative Essay (854 words). (2019, Jan 19). Retrieved from https://artscolumbia.org/inflation-essay-2-72017/
More related essays
ECON 202 CH. 6 Essay
Ch 6 Elasticity Essay
- Words 10062
A Basic Analysis Of The Balkan Economy In Relation Essay
Managerial Economics: Analysis of the Indian Telecom Sector Essay
Jennifer Loughery 082970 Essay (2589 words)
Taxation in Japan Essay (3941 words)
Ecomomy In 2000 Essay (3093 words)
Theory of Consumer Choice Essay
Do Soaring Price and Mounting Demand in Indian Gold Market Speak of a Paradox? Essay
Hi, my name is Amy 👋
In case you can't find a relevant example, our professional writers are ready to help you write a unique paper. Just talk to our smart assistant Amy and she'll connect you with the best match.
The Effects of Inflation Essay
The Effects of InflationIn the world of economics, the phenomenon of inflation is described as a rise in the general level of prices and goods in an economy over a period of time (Wyplosz and Burda, 1997). When the general level of price rises, each unit of a given currency buys less products or services; because of this consequence, inflation is also a decline in the real value of the aforementioned currency. This causes a loss of purchasing power in the medium of exchange, which is also the monetary unit of accounting in an economy (Central Bank of Iceland, 2008). Inflation is something all economies must endure, and inflation causes a variety of effects on those economies, both positive and negative.
Inflation can be prompted from a decline in the economy and lobbying by borrowers for an increase in money production (The politics of inflation, 2008). It is generally agreed upon by economists that high rates of inflation and hyperinflation, a severe rise in prices, is directly caused by the influx of newly printed money (Barro and Grilli, 1994, p. 139). Because of the adverse causes that inflation have upon an economy, most economists prefer a low steady rate of inflation (Hammel, 2007). Low inflation has the ability to reduce the severe impact of inflation’s effects upon the economy, preventing economic recessions and enabling the labor market to adjust better when the economy takes a downturn (Inflation, 2008). The effects of inflation upon an economy can be broken down into positive and negative effects.
We Will Write a Custom Essay about The Effects of Inflation Essay For You For Only $13.90/page!
While no differential is completely black and white, this division provides very clear differences of inflation’s effects on the economy. Many economists have laid bare their views on the ideas and effects of inflation, and this provides us with an idea of how the effects can be broken down for consideration. Many people who do not have a background in economics, or a knowledge of the way economics works, would like to believe that there are no positive effects to be gained from inflation. However, these views are shadowed by personal experience and not a wide view of how inflation affects the economy as a whole. Examples of positive effects that inflation has upon the economy are it’s ability to help labor market adjustments, reduce debt, leaving room to maneuver within the economy, and the Tobin effect.
Using the Keynesian economic theory, which is the theory that money is transparent to the real forces in an economy and that the pressure of these forces is the cause of inflation, it can be believed that nominal wages adjust downward slowly. This leads to a high level of unemployment within the labor market due to prolonged disequilibrium. Because inflation lowers the real value of wages, if nominal wages are kept constant, it is argued that inflation is a benefit to the economy because it allows for the labor market to achieve equilibrium more quickly. According to the Keynesian economic theory, equilibrium within the labor market is key to a healthy economy. The effect that inflation has upon debt is a great benefit to the borrower.
Borrowers who have a fixed rate of interest will see a reduction in the real interest rate as the inflation rate increases. The real interest on a loan is figured by the nominal rate minus the rate of inflation, or R = n – i. For example, if the stated interest of a loan is 7%, and the inflation rate is 4%, the real interest that the borrower is paying for the loan is 3%. The higher the inflation rate, the more benefit that the borrower receives. If the same loan with a fixed rate of 7% were in an economy where the inflation rises to 15%, then the borrower would have a real interest rate of –8%. This highly benefits the borrower, but it also detriments the lender. Many money lenders, including most banks, make adjustments for this type of inflation effect, by including an inflation premium in the costs of lending the money, or by having a variable interest rate instead of a fixed rate.
In essence, the benefit of debt relief for borrowers, which is a positive effect, is also a negative effect for banks and other lenders. To control the money supply, banks use the primary tools of the ability to set the rate of discount, the rate at which the banks borrow from a central bank, and controlling the open market operations, the central bank’s interventions into the bond market. This is used to control the rate of nominal interest within the economy.
If the rate of inflation is low, or reaches zero or below, then banks cannot cut the nominal rate when the economy is in need of stimulation, which is called a liquidity trap. Keeping the inflation rate at a moderate level ensures that banks avoid this liquidity trap and are able to lower the nominal interest rate if necessary. In this manner, the effect of inflation allows for economic stability. The best argument that can be offered that inflation is a positive economic consequence is the Tobin effect. James Tobin, a noble prize winning economist, has argued that moderate levels of inflation lead to an influx of investment within the economy. Because inflation lowers the real value of currency, it lowers the return that investors receive on monetary assets. Due to this fact, investors favor turning monetary assets into real assets, physical capital for example. In order for investors to avoid the negative effect of inflation upon the value of currency, and therefore investors’ monetary assets, investors choose to invest in physical capital, which would not lose value due to inflation.
This allows for economic stimulation in the areas of physical capital. Unfortunately, inflation tends to have a more negative effect on the economy than a positive one. While it is able to be helpful in the ways mentioned above, the negative factors are larger and have a greater impact upon the economy, especially factors such as hyperinflation and cost-push inflation. Cost-push inflation is a wage spiral that causes further inflationary expectations.
Rising inflation prompts many employees to see higher wages, and often demand higher wages from current employers so that they can continue with their current quality of life by keeping up with the increase in the price of goods and services. The rise of wages then in turn helps fuel inflation. Collective bargaining causes wages to be set as a factor of price expectation, which will be higher when inflation takes and upward trend. This can cause a wage spiral (Encyclopedia Britannica) Hoarding is also a common negative effect of inflation. Consumers will purchase goods that will continue to be a store of wealth in order to rid themselves of excess cash before it becomes lower in value.
This creates a shortage of the goods being purchased because they are being bought in larger quantities in ordered to be hoarded until inflation takes a downward turn. Hyperinflation is when inflation becomes totally out of control in the upward direction. Hyperinflation wreaks havoc upon the normal workings of an economy. It severely hurts the economy’s ability to supply goods and services to consumers, and causes high unemployment levels (Inflation inconveniences, 2008).
Inflation negatively affects allocative efficiency as well. A change in the supply or demand of a specific good will cause a change in price for that good. This signals buyers and sellers to re-allocate resources because of the change in market conditions. However, when a price is continually changing because of the effects of inflation, it is difficult to for agents to correctly re-allocate resources and this creates a loss of efficiency. There is also a negative effect to opportunity cost, known as “shoe leather cost”. What this means is that it costs people a greater opportunity cost to hold a cash balance, and often shows most people holding money in interest bearing accounts instead.
However, cash is still needed for purchases, so that means that people have to make more trips to the bank to withdraw funds. The name “shoe leather cost” is derived from people metaphorically “wearing out the shoe leather” with all of the extra trips. In our economy today, debit cards are helping to counteract this opportunity cost. There is also a negative inflation effect upon the many businesses that use brochures or menus, which contain pricing. Inflation causes these businesses to have to change the prices of goods or services, which in turn means that the businesses must print new menus or brochures reflecting the price change. When inflation is in a constant flux, this can create quite a large additional cost for businesses because of the continual need to reprint brochures and menus. The most damaging effect of inflation is when inflation upsets the business cycle.
This can lead to artificially low interest rates, which when added to the increase of monetary supply associated with inflation causes reckless, speculative borrowing. Reckless borrowing leads to large amounts of bad investments, which have to be liquidated when they become unsustainable (Thorsten). Inflation can have both positive and negative effects upon an economy. Governments use inflation to both stimulate and decelerate an economy (The politics of inflation, 2008) New money is printed so that the government can spend the money within the economy, which allows for businesses to have an influx of said money and they can then spend the money in the economy as well.
However, though this is thought to be a way to cause great economic activity, which in turn pulls an economy out of a recession (The politics of inflation, 2008), this is not always the case. The money added to the economy will produce positive activity at first, but then the monetary value is lessened. The extra money causes a loss of value, so the situation eventually is reduced to its original circumstances and often worse circumstances. Economists have developed ways to combat the effects of inflation.
The primary tool that is used to control inflation and its effects is monetary policy. Other tools that are used include fixed exchange rates, the gold standard, and cost of living allowance. These tools are used to keep the effects of inflation at a minimum and to help prevent the severe negative effects such as hyperinflation and the offset of the business cycle.
The monetary policy tasks central banks with keeping the federal funds lending rate at a low, reasonable rate. Normally, this target rate is roughly two to three percent per annum, and includes a low inflation rate of roughly two to six percent per annum. Higher interest rates and a slower influx of money helps the central banks to combat the effects of inflation. Fixed exchange rates help to combat the effect inflation has on monetary value. A country’s currency is tied to another country’s currency or to currency of another kind.
This helps combat inflation by stabilizing the value of currency. Another form of monetary stabilization is the gold standard. This is when monetary notes, like paper money, are equal to a certain prefixed amount of gold. When the gold standard is used, the currency itself is of no value, but is accepted as currency because it is back by its equivalent gold value. Cost of living allowance is an important form of combating the effects of inflation. When cost of living allowance is used, wages are directly tied to inflation. When inflation increases enough, a cost of living increase is made to wages.
A specific cost of living index is used, and it usual on par with the consumer price index. This allows for employees’ wages to counteract the negative effect of inflation lowering demand for products, because employees can still afford products and services. The deep impact of inflation upon an economy is seen directly in the effects of inflation upon the business cycle, and the effects of inflation upon borrowing and lending.
The effects of inflation being both positive and negative require that inflation be kept in a delicate balance. Because inflation is required to prevent liquidity traps, and helps to stimulate the economy in certain ways, inflation cannot be eradicated completely. Due to the fact that inflation is needed, many ways of controlling inflation have been implemented to help keep the delicate balance of inflation and its effects. This is accomplished through the cooperation of the central banks, and those banks use of monetary policy. The gold standard helps to combat the effect of monetary destabilization, which is a large consequence of inflation.
The cost of living allowance also helps in the combating of inflation and its negative effects. In closing, it seems that inflation is a necessary evil within an economy. Due to its few positive effects, it cannot be ignored.
To keep the peace within the system of our economy, a delicate balance of inflation is kept through careful watch and the use of combative strategies.ReferencesBarro, Robert and Grilli, Vittorio (1994), European Macroeconomics, Ch. 8, p. 139, Fig.
8.1Bose, Niloy and Murshid, Antu P. (2008) “Mitigating the growth-effects of inflation through financial development,” The B.E.
Journal of Macroeconomics: Vol. 8 :Iss. 1 (Topics), Article 8.Bulkley, George (March 1981). “Personal Savings and Anticipated Inflation”. The Economic Journal 91 (361): 124–135. doi:10.2307/2231702.
http://www.jstor.org/pss/2231702. Retrieved on 2008-09-30.EconomyWatch. Effects of inflation. Retrieved April 27, 2009, from http://www.economywatch.
com/inflation/effects.htmlIt’s Time to Make Money. The effects of inflation. Retrieved April 26, 2009, from http://www.
beginnermoneyinvesting.com/html/the_effects_of_inflation_.htmIt’s Time to Make Money. Giving into the temptation of inflation.
Retrieved April 26, 2009, from http://www.beginnermoneyinvesting.com/html/ giving_into_the_temptation_of_.htmIt’s Time to Make Money. Inflation inconveniences.. Retrieved April 26, 2009, from http://www.beginnermoneyinvesting.
com/html/inflation_inconveniences_.htmIt’s Time to Make Money. The politics of inflation. Retrieved April 26, 2009, from http://www.beginnermoneyinvesting.com/html/the_politics_of_inflation_.htmLudwig von Mises Institute.
Inflation. Retrieved April 27, 2009, from http://mises.org/efandi/ch19.aspLudwig von Mises Institute. Inflation and you. Retrieved April 27, 2009, from http://mises.org/efandi/ch18.
aspLudwig von Mises Institute. What has government done to our money? Retrieved April 27, 2009, from http://mises.org/money/3s2.aspMankiw, N. Gregory (2002), Macroeconomics (5th ed.), WorthTaylor, Timothy (2008), Principles of Economics, Freeload PressWikipedia. Inflation.
Retrieved April 26, 2009, from http://en.wikipedia.org/wiki/InflationWyplosz, Charles; Burda, Michael C.
(1997), Macroeconomics: a European text, Oxford [Oxfordshire]: Oxford University Press
- The Relation Debtor and Creditor Essay
- The behavior of the London Interbank Offered Rate in the market during the financial crisis Essay
- Perception of Service Quality in Public Sector Banks Essay
- Inflation & Money Supply Essay
- Crm Practices in Banking Essay
- Economics of Poverty Essay
- Crm in Indian Banks Essay
- The Effects of the European Economic and Monetary Union on International Trade Essay
- Overview of Banking Operations in Shahjalal Islami Bank Limited Essay
- Application Of Fair Value Accounting Accounting Essay
Haven't Found The Essay You Want?
For Only $13.90/page
Hi! I'm Edwin!
Would you like to get a custom essay? How about receiving a customized one?
- Supply and Demand
- Interest rate
- Market economy
- Balance sheet
- Price elasticity of demand
- Economic Inequality
- Free Market
- Comparative advantage
Argumentative Grade Inflation
This issue can be resolved if students take responsibility for their education and recognize that grades should not be the primary motive for attending school. The purpose of going to school is to acquire knowledge and comprehend the subjects being taught. Primary school teachers should instruct students to prioritize understanding the material rather than fixating on grades. Grades ought to solely reflect a student’s comprehension and capabilities, rather than measuring unrelated factors such as bladder control or amount of printer paper brought to school. Teachers must refrain from granting extra credit unless it directly pertains to the curriculum.
During my third grade year, my teacher provided us with small orange construction paper squares as restroom tokens. These tokens had our names written on them. At the end of the school year, any unused tokens were collected and placed in a jar. The teacher then randomly selected tokens from the jar to award extra credit. A few weeks before the year ended, I discovered some orange construction paper in a cabinet in our classroom that housed school supplies. I took two entire sheets of this paper home and cut them into the same size as the original tokens. I ended up with around 20 additional tokens, and I wrote my name on each of them.
ready to help you now
Without paying upfront
The teacher called my name multiple times. These teachers, who are officials of education hired by the government to teach children, are giving out extra credit like this? I believe they are responsible for grade inflation, but this can be avoided if students focus on the material and strive to fully comprehend it. Students should make complete understanding of the learning material their main goal, regardless of grade inflation.
When students prioritize their understanding of the material over their grade, they may not achieve a perfect score. However, if students are wise enough to recognize that it is the comprehension of the material that matters, they can potentially appeal for a perfect score based on their understanding. This appeal is justified because they have truly grasped the material. Occasionally, teachers may assess students according to their personal opinions.
In my high school senior English class, my friend was respectful to our teacher and more. Despite being consistently late and not completing every assignment, my friend still managed to receive an “A”. I believe this grade is justified because it is not directly related to her understanding of the material. It is common for students in all grades except elementary to struggle with the concept that grades do not define everything.
Teachers in lower level grades should indicate to their students that grades are not the primary motivation for their efforts in class and completing homework. If the concept that grades are not everything is embraced, it will lead to a broader comprehension of numerous subjects among students and individuals in the future. I have a hope that the intelligence of the average human being will rise, rather than decline or increase at a slower pace. To summarize, I think it is crucial for grade school teachers to teach their students that academic performance is not solely determined by grades.
Cite this page
You can get a custom paper by one of our expert writers
- Economic problems
- Exchange rate
- Price discrimination
Check more samples on your topics
The problem with grade inflation.
Grade inflation is a rising concern for academia. Grade inflation occurs when a student receives a grade for course work unwarranted by the level of work or achievement demonstrated (Stone, 1995). Grade inflation not only harms the student, but harms the academic institution by degrading the value of its education. Over the course of 30 years,
INTRODUCTION This paper discusses several issues regarding inflation targeting to illustrate how this well-known framework has influenced the implementation of monetary policy in several economies, particularly in emerging markets. It also discusses some of the challenges ahead. Over the years, it has been clearly accepted that one of the contributions of inflation targeting has been its
Inflation on the Basis of Inducement and Time
Inflation is classified on the basis of the process through which it is induced. Under this category, there are a) deficit induced inflation; b) wage induced inflation; c) profit induced inflation etc. When it comes to deficit induced inflation, this is caused by the adoption of unbalanced budgetary policies. The government would resort to deficit
Inflation in India
This type of inflation it doesn't harm the economy of the country , the government can easily overcome the few damages fast. 1. 2. 2. Hyperinflation In this situation the price level rise up every minute and there is no upward limit to which the price level may arise in the course of time. This
Relationship Between Unemployment and Inflation
1. What are factor prices? How are factor prices determined according to Classical theory of income and output? 2. Explain the effects of the followings on economy according to Classical Theory of Income and Output: a)The new government in Nepal has taken initiatives with the assumption that there is no alternative to reconstruct the once
Macroeconomic Determinants Of Inflation In Vietnam Economics
Real universe job Inflation is considered a serious menace to economic wellbeing, since it causes the cost of life to lift and the value of investings to fall. In the instance of Vietnam, the state incurred high degree of rising prices during a long period 1995-2010, on mean 7 % /year, which is more relentless and
Winners and Losers of Inflation and Deflation
Inflation is defined as a persistent increase in the average price level in the economy. 1 This increase in the average price level causes a decline in the real value of money in the economy thus reducing consumer's purchasing power. Economists have put forward three different types of inflation: excess monetary growth, cost-push inflation and
The Study Of Inflation And Economic Growth
The survey of rising prices and economic growing has attracted extended literature throughout the old ages. This subject was ab initio studied under the inactive theoretical accounts such as IS-LM and AD-AS model. The inactive attack could non explicate the Dynamic and empirical facet of rising prices and growing therefore the demand of dynamic attack
Macroeconomics and Inflation: Is It Really a Bad Thing?
Macroeconomics as a whole studies the performance of an economy of a country. More particularly the focus of macroeconomics is on the economy at national level and the interaction between the national economy and the other national economies of the world. The following section discusses the questions asked in the assignment in details. Discussion Discuss the
Hi, my name is Amy 👋
In case you can't find a relevant example, our professional writers are ready to help you write a unique paper. Just talk to our smart assistant Amy and she'll connect you with the best match.
- Essay Database >
- Essay Examples >
- Essays Topics >
- Essay on Workplace
Good Example Of Inflation of Grades Argumentative Essay
Type of paper: Argumentative Essay
Topic: Workplace , Teaching , Marketing , Students , Job , Inflation , Education , World
ORDER PAPER LIKE THIS
It is common knowledge that grade inflation exists and that there are so many reasons as to why this happens. It is not only students who stand to ‘benefit’, but professors too. Students want to get higher grades in order to be competent in the job market. Professors on their part feel the pressure to give higher grades for fear of losing their jobs due to poor student evaluations. Such are the reasons why grade inflation continues in institutions of higher learning. One thing that these professors, institutions and students fail to understand is the fact that these students will fail to perform as expected out there once they get into the job market. It is no wonder that even after performing very well in academics, many students prove incompetent on the job. This fact only contributes to the belief that the practice of inflating grades exists.
According to Brent Staples, in his article Editorial Observer; Why Colleges Shower Their Students with A’s, he argues that, “colleges have simply issued more and more A's, stoking grade inflation and devaluing degrees.” Due to this, universities and even community colleges strive to make their institutions look good and be on the same level with competing institutions, therefore, releasing half baked students out into a very competitive world. Apparently, these institutions give no care about the quality of the grades. All the concern of these institutions rest on making a name for themselves and not the quality of the students they give the competitive job market. The sad story is that it is these students who will stand to lose because there are chances that they may end up losing the trust of their employers. Eventually, they may not be able to grow within their organizations or even lose their jobs.
Michael Moreau, on the other hand, through his article Grade Inflation: Is It Happening Here? talks of how poor student grammar is yet the same students score very high grades. It is for a fact that a student who uses very poor grammar in expressing themselves when it comes to their examinations may not score highly, but the astonishing fact is that the same students score As and Bs in their overall grades (Moreau 2). At this point one wonders whether the grades are genuine, or they are inflated. There are alarming reports that student grades are inflated, and these allegations cannot be doubted considering the performance indices in professional performance of many of these students. The last decade has seen a majority of graduates criticized for non performance and such details are a “tell it all” pointer to what exactly is happening in our colleges. It is not surprising at all that this trend will go on for a very long time just for these colleges and universities to maintain the fake standards they have set.
The questions that are raised because grades are getting better is whether it the students or the lecturers who are getting better. Instead, the assumption is that neither of them is as good as they ought to be. Diplomas and degrees are becoming ornamental by the day (Moreau3). Every other person who goes to university or college comes out with very good credentials and the completion to get employment has gone a notch higher. But this does not mean that these graduates are as competent as their credentials my make one to believe. The elite colleges and universities have not been left behind as their graduates have proven to be worse than those from community colleges. Wherever this education system is headed remains a question no one is willing to answer. Some people even think that this has become a national problem yet no one knows whether these institutions are feeling the heat about the questioning of the degrees they give out.
Some students juggle between college and work and, therefore, fail to attend most of their classes. Professors then go on to give students ‘A’ grades just to fill in poorly attended courses that might end up being cancelled (Staples 3). These are the same students who might end up giving a professor a negative evaluation if he or she fails to give them the grades they want. The two, professors and students connive to lie to the institution and the world that they are doing a good job when they are not. It is a give and take relationship that both seem not to understand is having a negative impact on not only the students, institutions and professors, but the world that expects these graduates to give a similar impression in the job market. Everyone out there fails to understand who is fooling who when this arrangement exists.
What makes matters worse is that students can appeal their grades, and they get a rise in them. Unlike some time back when students would live with the grades they scored for the rest of their lives, today students can challenge the grades they score and upon review, the grades go up. The grades are then given ‘cosmetic surgery’ to the liking of the students. It does no good to the grades because if it was a poor grade it ought to remain so. If the students have a problem with that then they can go on to redo the course. Such is an indicator that the students get what they demand and not what they deserve. It does not do the institution or the student any better. Giving in to the demands of students is one huge mistake these institutions do as this does not benefit anyone. Instead, such revisions will bring more harm than good because students will never work hard to pass their exams. They will do an exam like they want while knowing very well that, in case of any eventuality, they can always appeal and get a rise in grades.
Even with the pressures that students face in their lives about their studies in college, it is imperative that they do their best and get good grades. Professors, on the other hand, ought to be honest with their work regardless of the measures that may be meted on them if they fail to comply with the pressures of their employers, colleagues and students themselves. It pays to be honest and if inflating grades is anything to go by; this is dishonest and stands to benefit no one. It has become common knowledge that inflation of grades happens every day in almost all institutions of higher learning. It may seem good or beneficial, but it is not because of the conscience that one carries all their lives concerning the lies they use to satisfy the world. In fact, making students believe that they have earned an A when they deserve a C is sad and does not help them in any way. It is for this reason that we are losing educational value.
Moreau, Michael. Grade Inflation: Is It Happening Here? Chaparral. Web. Retrieved on 9th April 2014. Staples, Brent. Editorial Observer; Why Colleges Shower Their Students with A’s. The New York Times. Web. March, 8th 1998. Retrieved on 9th April 2014
Cite this page
Share with friends using:
Finished papers: 2843
This paper is created by writer with
If you want your paper to be:
Well-researched, fact-checked, and accurate
Original, fresh, based on current data
Eloquently written and immaculately formatted
275 words = 1 page double-spaced
Get your papers done by pros!
Renaissance period research papers, experiment case studies, sloth college essays, clint research papers, shark essays, submarine essays, dunmore essays, winchester essays, essay on relationship between globalization and refugee population, negotiating the environment essay examples, research paper on the rules of common person, example of research paper on marketing strategy implementation.
Password recovery email has been sent to [email protected]
Use your new password to log in
You are not register!
Now you can download documents directly to your device!
Check your email! An email with your password has already been sent to you! Now you can download documents directly to your device.
or Use the QR code to Save this Paper to Your Phone
The sample is NOT original!
Short on a deadline?
Don't waste time. Get help with 11% off using code - GETWOWED
No, thanks! I'm fine with missing my deadline
By: The Art Institutes Filed under: General Education
August 23, 2018
- NCAA Division II Teams
- Composite Schedule
- Recruiting Questionnaire
- Bearcat Club
- Bearcat Broadcasting Network
- Summer Camps
- Financial Aid
- Military Benifits
Learn more about our programs.
Student Feedback on Our Paper Writers
- Individual approach
- Fraud protection
Amount to be Paid
Avail our cheap essay writer service in just 4 simple steps
- Admission/Application Essay
- Annotated Bibliography
- Argumentative Essay
- Book Report Review
The experts well detail out the effect relationship between the two given subjects and underline the importance of such a relationship in your writing. Our cheap essay writer service is a lot helpful in making such a write-up a brilliant one.
From a high school essay to university term paper or even a PHD thesis
John N. Williams
You are going to request writer Estevan Chikelu to work on your order. We will notify the writer and ask them to check your order details at their earliest convenience.
The writer might be currently busy with other orders, but if they are available, they will offer their bid for your job. If the writer is currently unable to take your order, you may select another one at any time.
Please place your order to request this writer
Advanced essay writer
Read what our clients have to say about our writing essay services!
Orders of are accepted for more complex assignment types only (e.g. Dissertation, Thesis, Term paper, etc.). Special conditions are applied to such orders. That is why please kindly choose a proper type of your assignment.
John N. Williams
Advocate Educational Integrity
Our service exists to help you grow as a student, and not to cheat your academic institution. We suggest you use our work as a study aid and not as finalized material. Order a personalized assignment to study from.
We value every paper writer working for us, therefore we ask our clients to put funds on their balance as proof of having payment capability. Would be a pity for our writers not to get fair pay. We also want to reassure our clients of receiving a quality paper, thus the funds are released from your balance only when you're 100% satisfied.