INFLATION

INFLATION

A general increase in prices and fall in the purchasing value of money is called Inflation.Inflation means that your money won’t buy as much today as you could yesterday.

Causes of Inflation-

Money Supply-

We can also have inflation by changing the amount of money in the system.An increase in money supply involves increasing the amount of money in circulation and in peoples pockets. This can decrease in interest rates. either way, people are encouraged to borrow more and have more money to spend. when consumer spending increases, there is a greater demand for goods/services than there is supply, and therefore prices rise.inflation that arises from an increase in consumer spending is called demand-pull inflation.

Supply Shock-

Is caused by a drop in aggregate supply (potential output). This may be due to natural disasters, or increased prices of inputs. For example, a sudden decrease in the supply of oil, leading to increased oil prices, can cause cost-push inflation. Producers for whom oil is a part of their costs could then pass this on to consumers in the form of increased prices.

Unemployment-

People are needed to work/produce and employers are willing to pay more and more to get the most qualified workers, thus driving the wages up. They have nowhere to take the money from but to increase the price of their product/service. Thus driving the price level up (inflation).