Question

Describe the impact of inflation to the value of currency and economy of country. What is the different between inflation and deflation?

Answer 1

Inflation is a General rise in the prices of goods and services in an economy over a particular duration or a period of time. Prices of goods and services used commonly in our daily life starts to rise as a result of inflation.

Inflation impacts the value of currency and economy of country. When prices starts to rise , you need more money to purchase or buy the same amount of goods and services that you bought earlier. For example , you need $10 to buy a book and a pen last month, you need 12 dollars to purchase the same book and the pen this month. That means you need more currency to purchase the same amount of goods and services. So the value of currency decreases as a result of increase in inflation.

Inflation affects production, distribution employment and government spending in the short run. It also affects national income and economic growth of the economy in the long run. When there is  rise in inflation, economies nominal GDP increases without increasing real GDP.

Deflation is a fall in general price level of an economy due to increase in productivity and decrease in demand. So inflation is a rise in price level and deflation is a fall in price level.