What causes inflation to go up?
Why do prices go up each year, how can we stop it!
Best answer going get my best answer choice!
- NCLv 71 decade agoFavorite Answer
Let's start at the end; why do you want to stop inflation? Inflation pushes savers to invest; without inflation, savers might just hoard money...
Also, there are more important things than inflation (most notably, unemployment). In the pre-euro years, many European central banks (most notably, Germany's Bundesbank) were known as tough inflation fighters; but their countries were known as places where unemployment tended to stay in double digits. By cracking down on inflation, those central banks increased unemployment...
As to why prices go up, recall the Hume-Fisher equation of exchange:
MV = PQ,
where M is money supply,
V is money velocity,
P is price level, and
Q is real GDP
If you rewrite the equation:
P = MV / Q
you can easily see that prices can go up for three reasons: (1) an increase in money supply, (2) an increase in money velocity, and/or (3) a decrease in real GDP.
In practice, expansion of the money supply is the most significant source of inflation. Every once in a while, when inflationary expectations run high, you can see money velocity increase; people spend money fast in anticipation of it losing value...
- 5 years ago
Yes in all your questions. Overheated economy itself may not be the root cause of inflation, but everything else that come before the overheated economy all cause inflation. The overheated economy is the last forms of over invested, over developed economy in a short span of time frame. Generally, the economy become overheated because of outside capital pouring into the economy in term of saving and investment. The inflation is just a reflexion of the oversupply or money in the economy that not only making people feel richer from investing in the stock market, but also the basic rules of demand and supply applied here. Also there is a large impact from the relationship between exchange rate and interest rate regimes of the economy. The high interest rates will flaten out increase in investment in stockmarket while combating inflation. But, in relatively open economy, high interest could draw in foreign investment in term of saving and pushing currency speculation that would pushing up both the stock market index as well as the stregth of the local currency. Yes, if everyone spends more there will be more inflation.
- Hubris252Lv 71 decade ago
When the money supply grows more than productivity growth inflation ensues. Inflation is unavoidable. Even if the Fed could increase the money supply perfectly in line with productivity growth no one believes that they can. Prices increase based on the anticipated inflation rate.
- Anonymous1 decade ago
Prices go up, in large part, because the cost of labor goes up. The cost of labor goes up because people expect/need more money each year. This is best seen, in the reverse sense, by looking at the cost of computers and other electronics. These have gotten better but the prices have decreased because the manufacturing process is mostly automated (i.e.: reduced labor cost). One glaring exception in the Nintendo Wii. You can get one for about $250 if you can get one through a retailer. Unfortunately, the supply is not keeping up with the demand so it will cost you about twice that (or more) from places like eBay. That is the other factor that increases inflation is supply and demand.
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- bvgopinath2001Lv 41 decade ago
Generally people ask what inflation is. Is it a form of wealth? If so where can one classify this form of wealth? In what units of wealth is this measured?
For a while, define economics as study of nature, composition, laws, properties and classification of wealth. Apply the methods that chemists use to study matter. Inflation is the difference between future value and present value of a form of wealth. Mathematically,
Inflation = Future Value - Present value
OR Future Value = Present value + Inflation AND
% of Inflation = × 100
Now, one should observe that Future value and Present Value are measured in units of wealth. It is natural, according to doctrine of mathematics that their difference is also in same units of wealth. Therefore, one can come to a conclusion that inflation is also a form of wealth.
Can inflation be changed to other forms of wealth? Let us observe following equations.
1. Present value + Time = Future Value
2. Present Value + Inflation = Future Value
3. Present value + Interest = Future Value
From the above three equations we come to a conclusion that inflation can be changed to other forms of wealth like time and interest. What is the effect of inflation?
Consider that price of potato is Rs.6.00 per kilogram as on date. Assume that potato shall be priced at Rs.7.00 per kilogram next year. From this, we understand that value of potato has appreciated and value of money (rupee) has depreciated. Money has lost value and potato has gained value. The net result is zero. This is LAW OF CONSERVATION OF WEALTH. According to this great law, wealth can neither be created nor be destroyed but can be changed from one form to another. When one form of wealth appreciates, the other form of wealth depreciates and the net increase or decrease is zero.Source(s): My book Nature, Properties and Laws of Wealth
- RAWR.Lv 51 decade ago
Lol. Well, in the olden times it was because we printed too much paper money. =DSource(s): AP U.S History.