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Inflation
The Background Information
Inflation is the decrease in the money value hat is a rise in the general price levels. If the supply of money in a country grows faster as compared to the production of the money in the country, then inflation occurs. Due to the increased demand for goods since the money supply is more, the prices of the goods and services increase, causing inflation. The goods that may cause inflation include the rise in the cost of production and raw material goods. The rise in the price of the goods, therefore, causes a decrease in the value of money as the money can buy fewer goods compared to when there was no inflation. For example, if there is inflation, the value of rand decreases, and compared to what a rand used to buy previously, it will now buy fewer goods as the prices of products will have increased. The inflation rate in the United Arab Emirates for the years 2017, 2018, and 2019 was 1.97%, 3.07%, and -1.5%, respectively (Jumaa et al.). Inflation can, therefore, increase or decrease, and in the case where it decreases, it is referred to as deflation.
The specific problem
Inflation is the specific problem of the case. It is considered the general increase in the prices of goods in a country due to the decrease in the value of the currency operating in the country. It is calculated by calculating the change in the consumer price index. The consumer price index is calculated by, for instance, calculating and adding up the predetermined costs of goods and services used by an average person. The rise in the price of the goods over two months is then calculated and compared to the predetermined, which then gives the inflation rate. There are mainly four types of inflation, which are categorized according to the speed in which they rise. The first is creeping or mild inflation, which occurs when the prices of goods increase by 3% or less. The second is walking inflation, which is strong inflation, where the inflation rate is between 3% and 10%. Then galloping inflation follows where the inflation rate rises with a percentage of more than ten. It causes havoc and wreaks the economy. The last type is hyperinflation, where the prices rise above 50% a month. It is uncommon and has mainly occurred when governments print money to fund wars. Inflation may also be categorized as demand-pull or cost-push inflation.
Discussion and Analysis.
Inflation is caused by an increase in the demand for a particular product or service, which in turn causes the prices of goods and services to increase. The rise in demand may be caused by limited availability, and hence people take advantage of the situation and increase the price of the goods. This type of demand is called demand-pull demand. The price of goods increases may also cause inflation as a result of the increase in production costs. Production costs may be due to an increase in wages or the overall cost of production. Since the producers of the goods cannot suffer the loss, they transfer the costs to the consumer by increasing the price of the goods. This type of inflation is called cost-push inflation.
Inflation has its effects as, for instance, it causes an increase in the prices of goods. Inflation also affects the distribution of wealth and income as some people gain while others lose. For instance, creditors lose as they receive money that has less value compared to the goods they issued. Government revenue also increases during inflation as they receive more taxes, and at the same time, public expenditure increases as they have to spend more. The information from the case tells me that inflation can be managed by reducing debt, budgeting tightly, and also having emergency funds.
Works cited
Jumaa, Muhamad Abdul Aziz Muhamad Saleh, and Maher Ibrahim Mikhaeil Tawdrous. “Impact of the Monetary Policy on the UAE Economic Growth (Post Financial Crises).” China-USA Business Review (2019): 16.