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¶ … Inflation Tutorial" by Investopedia. Generally, this article seeks to give a concise and clear definition of inflation while highlighting how the measurement of the same takes place and how it impacts upon interest rates and investments. In Investopedia's opinion, "inflation is defined as a sustained increase in the general level of prices for goods and services" (2). Hence an increase in the rate of inflation makes money gradually lose its purchasing power. It is important to note that over time, a number of theories and explanations have been put forward in an attempt to highlight the causes of inflation. These theories include demand-pull inflation and the cost-pull inflation theories (Investopedia 2). When it comes to the measurement of inflation, the same is basically measured in terms of annual percentage increases. In most cases, inflationary rates are regulated through the variation of interest rates. In regard to investments, it can be noted that the impact inflation has on the same is essentially...
As Investopedia notes, amongst those affected most by inflation include fixed-income investors (5).
Part 2: Causes and Effects of Inflation
One of the causes of inflation according to Gillespie is "too much demand in the economy" (381). In this case, a sustained growth in demand of goods and services at a faster rate than supply eventually pushes the prices of such goods and services up. This in Gillespie's own words brings about a "demand-pull inflation" (381). The reasoning here is that firms increase the prices of goods and services when they cannot meet the demand in the marketplace. In basic terms, long queues and waiting lists, low stock levels as well as shortages characterize demand-pull inflation. Secondly, inflation according to Macdonald can also be brought about by sustained cost increases. In Macdonald's own words, "this type of inflation is referred to as cost-push or supply-side inflation" (229). In…
Works Cited
Gillespie, Andrew. Foundations of Economics. Oxford: Oxford University Press, 2007. Print.
Investopedia. "Inflation Tutorial." Options Outlet. 5th December 2006. Web. 31st November 2011.
Macdonald, Nadia, T. Macroeconomics and Business: An Interactive Approach. London: Cengage Learning EMEA, 1999. Print.
2.5. Limitations of the study At the level of the limitations, these refer to the usage of secondary information, as opposed to the collection of primary data through the direct analysis of the Chinese market. This limitation is nevertheless addressed through the integration of multiple sources of valid and verifiable information, leading as such to the creation of solid, relevant and reliable findings. The second limitation is one common to all research
" 2 Apr. 2004. Federal Reserve Bank of San Francisco. Retrieved November 21, 2006 from Web site: http://www.frbsf.org/publications/economics/letter/2004/el2004-08.html Ranson, David. "Inflation." The Concise Encyclopedia of Economics." Retrieved November 21, 2006 from Web site: http://www.econlib.org/library/Enc/Inflation.html Inflation." Wikipedia. Retrieved November 21, 2006 from Web site: http://en.wikipedia.org/wiki/Inflation#The_role_of_inflation_in_the_economy Svensson, Lars E.O., "Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others." Dec. 2003. Retrieved November 21, 2006 from Web site: http://www.princeton.edu/svensson/papers/jep2.pdf Inflation." Encyclopedia of American History.
Conclusions There is no generally accepted theory of inflation. The causes that generate it are numerous and include economic, psychological, social, political, internal, and external factors. Inflation is based on numerous partial causes, which correlated determine the inflationist process. Inflation is generally considered an unbalance between money and goods, consisting in the existence of excessive money supply in relation with the volume of goods subjected to transactions, resulting an excess of unsatisfied total demand. Given the processes that determine
"..most importantly, we find that inflation has a dramatic negative impact on the profitability of banks." (2006) Boyd and Champ additionally state that: "The world has seen a dramatic decline in inflation rates in recent decades, but concerns about inflation may still be warranted, especially in some countries. Evidence is mounting that inflation is harmful to economic activity even at fairly modest rates of inflation because of the way it
The clarification of the timeframe before the inflation will return to the level that has been targeted following the shock of employment rate shifts is "the horizon of the policy rule." (McDonald, nd; 73) Inflation rates grew for two years while interest rates were rising and yet unemployment was lowering during this time. In the United States, it can be noted as well that while unemployment rates grew inflation
The Federal Reserve should be able to control and measure the demand and supply on the market and correlate the two indexes. Also, and probably most importantly, the Reserve should constantly supervise and regulate the monetary system, assuring correspondence between the amount of money in coins and bills on the market and their coverage in gold and in the total quantity of goods and services produced. The economic practice has concluded