What is the relationship between inflation and economic growth?
Inflation and economic growth are associated with a often contradictory relationship. While the resulting interaction of inflation and economic growth is not always easily predicted, many economists believe that a low and stable level of inflation is advantageous than high, unpredictable. For more than a century of modern economies, many studies have shown that most economies tend to grow faster when accompanied by a low or slight level of inflation. On the other hand, the high level of inflation is generally associated with a number of problems, including slowed or stopped economic growth.
Inflation usually occurs when money supply increases compared to the production or price of goods. For example, if a hamburger costs $ 5 (USD) and a person has $ 50 to spend for lunch per week, they spend 10% of this money on the hamburger. However, if a person gets another $ 50 per week and a hamburger dealer increases their prices to reflect this wage, the same exact hamburger would cost $ 10, but the same percentage of the buyer's income wasIn other words, the purchasing power of the dollar decreases because the increase in money influenced both the buyer's income and the seller's prices.
low inflation levels and economic growth are often linked for several reasons. First, the existence of inflation allows central banks to maintain stricter control of interest rates. If the recession or depression has caused the central bank to reduce the interest rate to zero, it cannot further adapt to whether the situation deteriorates. The low level of inflation ensures that interest rates will remain above zero, giving the central bank the possibility to reduce interest as means against economic slowing.
Another way to associate with low inflation and economic growth is to maintain price stability. When level inflations are low, they also tend to be more stable, which means that fast, destabilizing shifts in purchasing power or prices are less likely. Price stability in generalIt supports investments because investors feel more secure about the future of the market.
On the other hand, a high level of inflation can sometimes cause confusion for economic growth. If the levels of inflation are high, people can accumulate goods for fear of deficiency, causing market transactions to slow down and cause the real possibility of lack of basic goods. The high level of inflation can also reduce the purchasing power of the dollar faster than the labor markets can respond with wage increases, causing many workers with previously sufficient income so that they can not suddenly meet.
Another potential danger of high inflation and economic growth is the increasing risk of market instability. Quick or high inflation can destabilize price levels, making it much more difficult to predict the future KET marching. Price destabilization can be very dangerous because investors can be discouraged, thereby slowing the growth of new business investments and stock trading. Unpredictability of high inflationIn addition, it can make it difficult for economists, central banks and governments to come up with viable plans to control or reduce the level of inflation.