Causes and Effects of Inflation

Causes of Inflation

① When the amount of money supplied by the government exceeds the money demanded by the people, inflation occurs. Its the same principle as when the demand is higher than the supply of the good then  the price of a good increases.

② Inflation sometimes occurs due to the increase of the cost. When there is an increase of wages, price of resources and oil, the economy might suffer inflation. The price of resources can increase because of the increase of the exchange rate.

③ If monopolistic companies control the market and increase the prices of goods, inflation can also happen.

Effects of Inflation

① There are disadvantages for the people who own cash and bonds but advantages for people who own real properties such as houses or gold.

② Wage workers and loaners have disadvantages and debtors have advantages. These two factors combine and create an unfair distribution of wealth.

③  Because domestic goods get more expansive compared to foreign goods, the country imports more and exports less.