What is inflation? Explain its major causes and effects on consumers and the economy.
Answer:
Inflation is the sustained rise in the general prices of goods and services over time, which reduces the purchasing power of money.
Major causes of inflation include:
- Demand-pull inflation: Demand exceeds the available supply of goods and services.
- Cost-push inflation: Rising costs of fuel, raw materials, wages and transportation increase product prices.
- Increase in money supply: Excess money and credit in the economy can increase demand and prices.
- Supply shortages: Poor harvests, natural disasters or supply-chain disruptions can reduce supply and raise prices.
- Imported inflation: Higher prices of imported goods, such as crude oil, can increase domestic prices.
Effects of inflation: Inflation increases the cost of living and reduces consumers' purchasing power. It can reduce the real value of savings, increase production costs for businesses and create economic uncertainty. High inflation may also lead to higher interest rates as central banks attempt to control rising prices.
