The Effects and Causes of Inflation and Depression

Topics: Inflation, Unemployment, Recession Pages: 2 (665 words) Published: March 3, 2013
Inflation is the overall level prices of goods and services rapidly increase in an economy over a period time. When the overall price level increases, it will affect the decreasing purchasing power of the currency.

An economic inflation is not occurs suddenly, it is causes by three types of inflation. The first cause is demand-pull inflation results from increases in aggregate demand on goods. The excess demand will cause the level price of goods rises. This is commonly described as "too much money chasing too few goods". The second cause is cost-push inflation is due to the decreases in aggregate supply. The natural disasters or increases prices of inputs also will lead the drop in aggregate supply. Thus, happen the excess demand in an economy. The third cause is built-in inflation which is cause by the higher wages of workers. And then firms will charges the higher prices on customer when passing the higher labor costs to them.

The inflation have several kinds of effect. One of the effects is menu costs, the firms must keep up to change their prices with economy wide changes. The requirement to pay additional costs due from the price changes is call menu costs. Besides, the inflation will affect the saving accounts negatively. It is because the inflation will reduce the purchasing power of the interest paid and the currently interest rates are very low. Thus, it will reduce the incentive for saving money. In addition, the effect of international trade will make exports more expensive and tend toward a weakening balance of trade. Furthermore, the incentive of investment will reduce when the uncertainly price of input and commodity price will lead the firms make the wrong decision. The last one of the effects is the inflation have increased the consumer spending. This prompt trade unions to demand the higher wages. The rising wages can help fuel inflation. In a sense, inflation begets further inflationary expectations.

The depression is the overall...
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