What Are The Effects Of Inflation?

February 9th, 2009 Comments off
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What can be the effects of inflation?

Some major effects are as follows:

  • Discourage Investment

Due to inflation, more people prefer to liquidate their financial assets to purchase land or other fixed assets which can appreciate in prices. There will then be lesser fund for productive investment such as building factories, etc. By doing so, this will reduce labor productivity and employment opportunities for workers

  • Decrease Gross Domestic Product

With higher prices, factories might produce lesser quantity of goods and services. These will decrease aggregate demand and shrink the economic growth of the economy.

  • Reduce Savings

Less people will save as inflation erodes the value of money. Rather more people will take out their savings to buy houses and other real estates where prices will rise during inflation.

  • Inflation greatly influence macroeconomics policies of a country

Tighter monetary and fiscal policy will be imposed during a period of high inflation. Inflation is one of the evils that economists would want to reduce.

  • Increase Poverty And Criminal Rate

When the government tightens its monetary and fiscal policies during inflation, this will give rise to recession like the US recession in 1982 which was a direct result of economic policies design to reduce the rate of inflation. Like a viscious circle, recession increases unemployment rate which leads to poverty and can increase social problems in a country.

  • During Inflation this will create certain impact on two groups namely GAINERS OR LOSERS (refer article)

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