In other words, inflation may be unanticipated when people fail to adjust completely. Cost of production may rise due to a rise in the cost of raw materials or increase in wages. In addition to aggregate demand, aggregate supply also generates inflationary process.
Money loses its store of value function. If the inflation rate is high and unanticipated, lots of problems can occur. Again, CPI may be induced by wage-push inflation or profit-push inflation.
They also indulge in adulteration of commodities.
This happens only when the country follows a fixed exchange rate policy. Inflation is the general increase in the price level over a period of time. But wage rate changes with a long time lag. Inflation also affects another function of money known as standard of deferred payments.
That is why people use their money balances in buying real estate, gold, jewellery, etc. Rising saving propensities will result in lower further outputs.
Money makes it easy to compare goods 3. According to classical economists or monetarists, inflation is caused by the increase in money supply which leads to a rightward shift in negative sloping aggregate demand curve. To some, a creeping or mild inflation is one when annual price rise varies between 2 p.
Note that, in this region, price level begins to rise. This tends to increase imports and reduce exports, thereby making the balance of payments unfavourable for the country. Though debtors return the same amount of money, but they pay less in terms of goods and services.
As a result, production is hindered.Explain how inflation affects the functions of money. Inflation is the general increase in the price level over a period of time. Money is something that is generally acceptable in. Thus this function of money encourages consumptions by households.
Inflation adversely affects the function of money. With higher prices, money loses its value thus it can no longer act as a medium of exchange.
The transactionary demand for money falls. The net effect of inflation is that it serves to transfer money from savers and investors to debtors. It punishes those who postponed their enjoyment and invested in building roads, schools, factories, and businesses—and gives their reward to those who are in debt.
The effects of inflation are to some extent as it can be expected or unexpected. Whatever form it takes inflation, entails costs and the higher the rate of price changes the higher the costs.
There are costs of holding money, so that operators spend more time discussing what to do with their money balances.
Essay on Inflation: Types, Causes and Effects. Article Shared by. According to classical economists or monetarists, inflation is caused by the increase in money supply which leads to a rightward shift in negative sloping aggregate demand curve. Essay on the Effects of Inflation.
Inflation however affects many thing one being function of money such as medium of exchange, store of value, unit of account and standard of deferred payments. Medium of exchange means that any item that is widely acceptable in exchange of goods and services.Download