Question

What is inflation and what are some causes of inflation?

Answer 1

Inflation is referred to the phenomenon of increasing prices of goods and services over a period of time.

The main causes of inflation can be described as follows:

Money Supply - One of the primary cause of inflation is the increase of money supply in the economy. One source of increasing money supply is the printing of new currency which creates inflationary pressure in the economy.

National Debt - A country is said to be in debt, when the government is not able to finance its expenditure on its own and has to borrow from external or internal sources in order to meet its expenditure. One easy way to repay debt is by printing new currency which results in inflation.

Wages - As workers wage rises, their purchasing power also rises and they will possess higher amount of money to spend which increases the circulation of money within the economy and thus creating inflationary pressures in the economy. This is also known as demand pull inflation.

Input prices - As the prices of input or raw materials used for production rises, the producers induced with profit motive in order to raise their profit shifts the burden of increasing prices of raw materials over to the consumers in the form of higher prices. Thus the price of goods and services increases. This is known as cost push inflation.