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Inflation
Emilie Velasco
ECO 2013
Basil Ibegbulam
16 June 2015
Inflation is a general rise in price level. It is also described as a continuous increase in the
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general level of prices for services as well as goods. In contrast to this, deflation is when the
general level of prices is falling. There are numerous ways deflation can be caused, for example
a decline in the quantity of money or credit that is supplied. Another way deflation is caused is
by a decrease in spending, specifically government, personal or investment spending
(“Deflation”). A negative effect caused by deflation is an increasing amount unemployed
individuals. During an economic period where deflation is present, unemployment rises due to a
lower demand level in the economy. This drop in demand can cause an economic depression.
Two types of inflation are demand-pill inflation and cost-push inflation. The difference
between these two types of inflation is not the effect they have but in what causes them. The
same effect is seen in both of them, which is an increase in the level of price; however, diverse
things cause them. Demand-pull inflation occurs when there is an excess spending or demand
relative to output and when the central bank issues an excess of money. Cost-push inflation on
the other hand occurs as a result of supply shocks or disruptions in supply and when there is a
rise in per-unit input costs. Supply shocks are when an unforeseen incident alters the supply of a
product or commodity, causing an abrupt change in the price. It can either increase or decrease
this supply (“Moffatt, Mike”).
The problem with inflation is related to redistribution. For example, inflation can make
certain individuals either better off or worse. The three effects that cause this distribution are
price, income, and wealth effects. For example, underprice effect prices may increase quicker
than other prices, as the average level of prices increase. The outcome of this would be that only
certain individuals are primarily affected, while others are barely affected. Relating to income
effects, since certain prices increase quicker than others, some incomes increase quicker than
other incomes. Fixed-income receivers, savers and creditors are the ones who are negatively
affected by inflation. Fixed-income receivers are hurt by inflation when real income falls, while
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savers are hurt when the value of accumulated savings deteriorates. Creditors are when lenders
get paid back in cheap dollars. Redistribution is not the only negative result of inflation. There
