wat happens during inflation?

Answer 1

costs of goods rise, making money less valuable

alternately, air is injected into a balloon, making it get larger

Answer 2

Inflation is an increase in the prices of goods and services for consumers. Inflation happens because the government has done a poor job in managing the economy. Generally, inflation is preceeded by an increase in the number of dollars in circulation. The Federal Resrve produces and distributes dollars in the economy. When the FED overproduces dollars, they set the stage for a period of inflation.

For instance, The FED produced an enormous amount of dollars in the 2001 to 2003 period. They did this by lowering the bank overnight rate to one percent in a series of monthly adjustments. Businesses and investors responded to the attractive low interest rates by borrowing more money. The effects of this overproduction of dollars was most evident in the real estate industry where prices for homes and land skyrocketed. The real estate boom peaked in late 2005 by which time prices had increased in many American cities by anywhere from 30 to 150 percent in a four year period. The boom was stopped because the FED in late 2003 started to increase rates. From 2004 to present, the Fed increased the rate to over 5 percent effectively cutting off the money supply which had created the tremendous surge in real estate prices. The real estate industry is still reeling from the inflationary spiral as is indicated by hugh volumes of unsold inventory, unaffordable housing conditions, and slowly falling prices.

Other effects is the devaluation of the dollar on international markets. Producing too many dollars results in less value per dollar, and foreign exchange rates are quick to respond by decreasing the value of the dollar to other world currencies. This process causes foreign imported goods to increase in price.

This same overproduction of dollars dimishes the value of evey Americans savings account causing goods and services to cost more relative to the dollar. Finally, the debacle reaches the point where people must make more money to make up for the loss of value of the dollar. They demand pay raises and the inlationary cycle perpetuates itself by making the labor portion of United States produced goods and services more expensive.

The full effects of the current inflationary cycle are still to be felt by the American economy. Illegal immigration has masked the true labor costs of inflation by supplying the American economy with close to 20 million workers who because of their status have accepted lower pay for the jobs they perform. The flood of cheap imports by the Walmarts of the world have also delayed the potential impact of the dollar overproduction.

In essense, inflation is raging around us, but the American consumer can hardly feel the impact.

Answer 3

Gas and Oil prices go up
Transportation takes it out on prices on goods and services and food and you notice your take home pay is eaten up by your utility bills and food prices go sky high and you cant afford to have fun or frivolous things any more. You can barely afford to live or breathe and I can't suggest they would put a price on air too.
Don't give them any more ideas. The price of Barbie doll went up to the oil to create the doll to even the color for the skin of the black Barbie...or prices changed on the shelves to the little girls who buy them because of inflation!

Answer 4

u lose buying power. Meaning u can buy less with the money u have before the inflation

Answer 5

Poor people get poorer and the rich get richer

Answer 6

prices go up faster than salaries do. That's the very simple version.

Answer 7

commodities prices go up causing pain for poor people

Answer 8

To understand inflation, we first must understand what the word means. The Economics Glossary defines Inflation as:
Inflation is an increase in the price of a basket of goods and services that is representative of the economy as a whole.
A similar definition of inflation can be found in Economics by Parkin and Bade:
Inflation is an upward movement in the average level of prices. Its opposite is deflation, a downward movement in the average level of prices. The boundary between inflation and deflation is price

During inflation, interest rates go up; stock prices go up. There is a rise in the general level of prices. You lose buying power; as people save more. The price of gold and antiques go up. There is an increase in the supply of money that causes the increase in prices i.e. inflation is a cause rather than an effect.


Why is inflation a problem?

1. Not everyone’s nominal income rises at the same rate as inflation. Income and wealth are haphazardly redistributed because prices change at different rates. People on fixed income may see their income fall. Landlords bound by fixed term leases would see their rental income fall. Purchasing power of personal savings deteriorates. Fixed income receivers, creditors and savers-owners of financial assets like money, bank accounts, stocks and bonds are hurt by inflation as their assets lose value. In general those who are lenders are harmed by unanticipated inflation. On the other hand, borrowers (debtors) gain from such inflation as the amount they have to give back is less in real terms due to inflation.

2. Inflation leads to malinvestments. It deranges the price mechanism, certain investments go up faster as compared to when prices are stable; this results in lots of windfall gains and losses. For instance, prices of real estate, jewelry, gold and antiques rise faster during inflation; more money is invested in these goods. However, putting our borrowed money or savings into these non-producing types of commodities is not the most efficient way to increase the country’s wealth. Higher inflation which causes prices of housing to rise may help real estate owners increase their wealth, but it encourages money to flow into ventures which otherwise would not have been as attractive. Instead of funds flowing into ventures which produce additional wealth, it is being invested in consumption items which do not add to the country’s productive capacity. Some workers who could afford to purchase a house ten or fifteen years ago, can no longer do so.

3. Inflation leads to higher interest rates in the long run. Initially when the government increases the money supply, the increased availability of money may lower interest rates. However, the higher prices and lower value of the money leads banks and other financial institutions to raise rates in order to compensate for the loss of the purchasing power of their funds. Higher long term rates discourage business borrowing, which leads to less investment in capital goods and technology.

4. Inflation can reduce production because money becomes almost worthless and people revert to (inefficient due to high transaction costs!) barter exchanges. In several countries, recent hyperinflations led to dollarization of domestic transactions.

5. Higher prices of goods means that other countries will find it less attractive to purchase our goods. This will lead to a decline in exports and lower production and higher unemployment in our country.

6. Higher prices lead to increases in taxes. Nominal (not real) incomes rise along with inflation and push income earners into higher percentage tax brackets. So even though purchasing power does not increase, a person pays a bigger chunk to the government.

7. Inflation creates future prices uncertainty. In case of very high inflation, hyperinflation, it is difficult to persuade people that the burst of inflation has come to an end once it really did.

8. Inflation encourages consumption instead of saving. Higher prices induce people to purchase more products now (before they become more expensive) and discourage people from saving, because money saved for future use will have less value. While high level of consumption is not bad on its own, too much consumption discourages savings needed for investments in capital goods and technology, - the real causes of wealth in our economy.

The effect of anticipated inflation is different, or even nonexistent. Lenders and borrowers who anticipate increase in nominal prices do not enter into fixed price contracts. Lenders (banks) protect themselves against adverse effects of inflation by charging inflation premium equal to the expected rate of inflation, or use variable-interest-rate mortgages.

Answer 9

Money gets cheaper.