Introduction
There has been so much learned talk about the threats and dire consequences of inflation that plain folks begin to be suspicious. Did not the economists of the 1920s, except for a few outsiders whom the others scorned as orthodox doctrinarians, forecast everlasting prosperity? What if their present fears are no better founded than their optimism fifteen years ago? The layman, therefore, has the right to ask the specialist to explain the matter and to do so in simple terms. We economists should not be exempt indefinitely from the obligation, which is accepted by doctors, engineers, and other scientists, of making ourselves understood by the layman. The obligation is clear-cut in the matter of inflation, an economic problem that is as close to every as his own skin.
Everybody knows that inflation consists of a large increase in the available quantity of money and money substitutes such as bank credits. For example, in a country like the United States, which transacts so much of its business by checks and through bank credits, the main vehicle of inflation is not so much the printing of additional paper money as the increase of deposit currency. Everybody also knows that a general rise of prices and wages is the unavoidable and inescapable result of inflation. And finally, most people realize that when inflation is going on price control is a quite ineffective method of controlling prices and wages; at best, it is a temporary expedient to break or postpone the force of inflationary effects.
And in this term paper I will define causes and consequences of inflation.
Inflation: a definition
Most continuing inflations are initiated and sustained by an excess of spending in the economy as a whole. That is, when people, groups, businesses, government, and foreigners all together "demand" or try to spend more than the economy can produce at full employment, prices in general will be bid up. Until the excess demand for goods and services is reduced and/or the capacity of the economy to produce is expanded, the price level will continue to rise.
Inflation – a long term, persistent increase in the price level. From the quantity theory identity that money stock times velocity is equal to the price level multiplied by real output, one can specify the rate of inflation as monetary growth + rate of change in velocity – output growth.
Inflation therefore results in a form of income and wealth redistribution totally unrelated to any desirable goal of either economic or social policy. Thus there are losers as well as winners, in a relative sense, whenever inflation persists.
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