What is inflation – How does this harm the economy?

You may have heard about Venezuela in the economic news coming in newspapers or on TV channels. There, suddenly the price of goods increased and the purchasing power of the currency decreased. Because of this, unemployment and poverty are increasing there. The government there failed to deal with this situation and people had to choose a route of escape due to the problem. But have you ever wondered how it happened, what factors are responsible for it, etc. This condition is called hypertrophy. Through this article, we are going to inform you about the cause of this situation, its effects, etc.

Inflation (What is hyperinflation)?

Inflation arises as a result of continued inflation. It occurs when the prices of goods and services rise at a very high rate. In this situation, prices can rise by about 50% per month due to increased demand and decreased supply. If inflation is not controlled in a timely manner, the increase in the prices of goods and services can go beyond the control of the government. In this situation, the ability to purchase money is reduced. For example, if a fort had sugar for Rs 100 before, but during inflation, it may cost between Rs 1000 and Rs 2000. It usually occurs when a country is going through war or economic turmoil.

Due to inflation

When the government of a country starts printing excess currency and using it in the economy, then the situation of inflation starts. This increases the money supply in the economy, increases the prices and results in inflation. When inflation gets out of control, common people also start buying more and more goods. When the government completely fails to take appropriate measures and measure it, inflation takes the form of inflation. The government starts printing more money instead of reducing the money supply. With more money in the market, demand for goods and services increases and prices are constantly increasing due to lack of timely supply. A situation arises when the prices of goods and services go up by 50% per month. Excessive demand and low supply increase inflation. There are two major reasons for this –

Excessive money supply – Inflation occurs when the money supply increases significantly compared to the value of goods and services in the economy. A major reason for this can also be the debt burden of a country. When a country has high debt and the revenue from taxes is not enough, it can decide to print more currency. But if excess money reaches the market, then a situation of inflation may occur. For example, during the First World War in the 1920s, Germany began printing more currency. The government also printed government bonds. This increased the money supply in the economy as well as increased government debt and by the end of the war the inflation rate in Germany had reached 20.9% per day.

Temporary Fiscal Policy – When the government completely fails to control inflation, a situation of inflation occurs. All government expenses are financed through taxation, lending etc. The government relies on taxation to meet most of its expenses. Sometimes governments choose to borrow money from banks for infrastructure development etc. If the government continues to run short of funds, it can choose an alternative way of maximizing revenue by releasing more currency, but if it is not dependent on economic growth, the likelihood of inflation increases. Therefore, a temporary fiscal policy is also a major cause of inflation.

Effects of inflation

In the event of inflation, the price of the currency decreases. The foreign exchange market of the country is affected by the lowering of the price of currency because the increase in the money supply increases the price of foreign goods and services. Due to economic upheaval, people start migrating to other countries because of the fluctuations in the value of the currency. This greatly affects foreign trade. The rectangle refuses to do business. Domestic companies shut down their operations due to the increase in prices, which leads to an increase in unemployment. Losing the value of local currency makes bankers and lenders bankrupt. People may face a food supply crisis if there is a prolonged inflationary situation. This causes a shortage of food in the country. The government’s revenue runs out etc.

2 to 6 percent range is appropriate for inflation

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