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MLS 2C - #2 Inflation

Date post: 05-Oct-2015
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What is INFLATION?Inflation refers to General rise in Prices measured against a Standard Level of Purchasing Power.

It is the percentage change in the value of the Wholesale Price Index (WPI) on a year-on year basis.Main CAUSES of InflationDemand-Pull Inflation

- This type of inflation happens when the aggregate demand increases more than the supply.- The economy demands more goods and services than what is produced.

Cost-Push Inflation- When the cost of production increases, the price level automatically increases.

- It occurs when there is a shortage of supply combined with enoughdemandto allow the producer to raise prices.

Money Supply- A third cause of inflation is an over-expansion of themoney supply. The money supply is not just cash, but also credit, loans and mortgages. When loans are cheap, then there will be too muchmoneychasing to few goods, creating inflation.

- The prices of just about everything will increase, even though neither demand nor supply has changed.

EFFECTS of InflationReduces the Value of MoneyHigher Unemployment Higher Wage demandsIncrease in Tax Revenue Hoarding

Reduces the Value of MoneyInflation reduces the value of money thus making you pay more in the process. As a result, the value of themoney in handgets reduced and the amount that you thought of depositing into savings is spent covering the additional costs of purchasing necessities.

Higher UnemploymentInflation is a possible cause of higher unemployment in the medium term if one country experiences a much higher rate of inflation than another.

Higher Wage demands Price increases lead to higherwage demandsas people try to maintain their real living standards.

Increase in Tax Revenue The government gains from inflation through what is called fiscal drag effects.HoardingPeople buy durable and/or non-perishable commodities and other goods as stores of wealth, to avoid the losses expected from the declining purchasing power of money, creating shortages of the hoarded goods.

Effects On Health CareAs patients start bearing the genuine cost of their care, they will start behaving like real consumers and become much more attentive to price. Once health-care services provision is transformed into a true marketplace in which prices are driven both by supply and consumer demand, competition between providers should result in prices falling even further.

Philippine Inflation Rate (March 5,2015)

Inflation Rate: Iloilo City

World Inflation Statistical Update

ADB Latest GDP, Inflation Forecast to 2015Sept. 25 -- Following is a table of forecasts for the annual economic growth and inflation rates for Developing Asia through 2015 as reported in Asia Development Banks latest Outlook supplement.

Policies To Reduce Inflation

1. Monetary Policy- process by which themonetary authorityof a country controls thesupply of money, often targeting an inflation rateor interest rateto ensure price stability and general trust in the currency

2. Supply Side Policies- aim to increase long term competitiveness and productivity

3. Fiscal Policy- involves the government changing tax and spending levels in order to influence the level of Aggregate Demand

4. Exchange Rate Policy- The exchange rate of an economy affectsaggregate demand through its effect on export and import prices, and policy makers may exploit this connection.

5. Wage Control- Wage growth is a key factor in determining inflation. If wages increase quickly it will cause high inflation.


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