what is inflation?

Question

1. Inflation is an increase in the average price level of the goods and services in the economy. The unexpected inflation will shrink income. The greater the rate of inflation the lower will be the quantity of goods and services that can be bought from the given nominal income. Nominal income does not measure the actual purchasing power, this is measured by real income. Real income is the actual number of dollars received adjusting to the change in the price level. If the CPI (Consumer Price Index) increases and the nominal income remains the same, the real income i.e. the purchasing power decreases. Thus the consumers can buy little from the same amount of income they had before inflation occurred. Inflation also affects the wealth and the interest rate. Inflation can benefit the wealth holders since the value of assets often increase faster than the rise in consumer price. On the other hand, those who do not have wealth may suffer since due to rise in assets faster than inflation, it becomes difficult to acquire wealth. Unexpected inflation may benefit the borrowers. The real interest rate is equals to nominal interest rate minus the inflation rate. If the inflation rate is 10% and the nominal interest rate is 5% then the real interest rate will be -5%. This means even though the nominal interest rate of 5% is paid, the actual purchasing power will fall by 5% since the inflation rate is 10%.
Authorities can assure the markets, consumers and producers that they will keep inflation low by firstly, making sure individuals and businesses does not spend money quickly to buy goods and services when inflation occurs in fear of paying more tomorrow. Secondly, making sure nominal interest rate does not increase with the increase in inflation otherwise this will make the payments of installments difficult. Thirdly, making sure wage-price spiral does not continue to a greater extent. And making sure the new factories, machinery and technological research are carried out. Also the government should not print money to pay bills which will rise prices frequently, sometimes increasing in minutes.

Answer 1

The devaluation of money.

Answer 2

Simply put. Inflation is the devaluation of money, by increasing the supply.

It's a hidden tax, and a means of wealth transfer.

e.g.

1. Government requests to borrow $100,000.
2. The reserve bank creates $100,000.
3. Government spends $100,000 into economy.
4. Money supply increases by $100,000.
5. More money chasing same amount of goods = more spending to buy same amount of goods = price rise = inflation.

The government got the full value of the $100,000 because inflation takes up to 6 months to surface. After 6 months the $100,000 would buy fewer goods or services.

Answer 3

Think that economics is study of nature, properties, composition, laws and classification of wealth. Now answer the question: Is Inflation a form of wealth?
Before proceeding further, let us study Law of Conservation of Wealth. According to basics of algebra, one can add 2a and 3a. One can subtract 2a from 3a. Can any one add or subtract 2a to/from 3b? No. Can anyone add 2 kilometers and 5 kilometers? Yes. Can any one subtract 3 kilometers from 5 tons? No. Let a be wealth and b be non-wealth. We can not add or subtract non-wealth to/from wealth. This leads to the inference or conclusion that wealth only can be added/subtracted to/from wealth. This is in simple words Law of Conservation. Wealth can neither be created nor be destroyed but can be changed from one form to another. Now, consider the following reactions of wealth:
1. Present value + Time = Future value
2. Present value + Inflation = Future value.
OR Inflation = Future value - Present value and
Time = Future value - Present value
From the above, we come to understand that inflation = time.
Since inflation is measured in units of wealth, inflation is a form of wealth.
Where do you classify this form of wealth? We can classify wealth in two broad classes : wants comprising of goods and services that an economic entity wants to own or possess and means comprising of money and money related forms of wealth. If I am asked to classify inflation, I would classify it as means since it is often measured in units of money. Further if one classifies means into future means (like loans, credits etc), and present means, I would classify inflation into future means.
Now consider this equation: Present value + Interest = Future value.
From this equation, we come to know that inflation = interest.
Finally, I would summarize the properties of inflation. Inflation is a form of wealth, generally measured in units of money or as percent of present value of money and that inflation can be changed to other forms of wealth like interest, time, etc.
It is time now to study wealth on the lines chemists study matter since chemistry is study of nature, composition, laws, properties and classification of matter. I would rather advise to redefine economics as study of nature, properties, composition, laws and classification of wealth.

Answer 4

this is not Jeopardy, where you give us the answer and we ask the question, BUT--I will ask anyway--WHAT IS THE QUESTION ???

Answer 5

You have it nailed. Well done !

Answer 6

you got it

Answer 7

you are absolutely right!