introduction

Impacts Of Inflation On Economy

By Vidula Patil
Roll No. 540 Batch No. 23 Div. E

Impacts Of Inflation On Economy

Treasury Of The Nation:

To assure that the public gets back their money, governments like USA provide for Treasury Inflation-Protected Securities (TIPS) that charge lesser interest rates. Therefore The treasuries are adversely affected.

Purchasing Power of currency:

One of the most immediate effects of inflation is the decrease in the purchasing power of currency owing to the decrease in the relative value of currency.

Allocation of Money:
Affects the dealing of lenders and borrowers because the loan sanctioned before the inflation period are paid back later in the form of inflated money, i.e money with lesser relative value.

Time Value of Money :

Time Value of Money is most commonly expressed in terms of Interest it receives and inflation is the principal component affecting The rates of interests.

Why is inflation bad?

Unanticipated inflation is bad because it makes the economy behave like a giant casino. Gains and losses occur because of unpredictable changes in the value of money. If the value of money varies unpredictably over time, the quantity of goods and services that money will buy will also fluctuate unpredictably. Resources are also diverted from productive activities to forecasting inflation. Unanticipated inflation leads to :

India:
A glimpse of inflation in India

Inflation in India generally occurs as a consequence of global traded commodities and the several efforts made by The Reserve Bank of India to weaken rupee against dollar. This has been regarded as the root cause of inflation crisis rather than the domestic inflation Due to sharp rise in the prices of meat, vegetables, milk and pulses, inflation has reached 7.23% in April 2012.The value was 9.74% in April 2011.

India is deeply intolerant of high inflation accounting to very conservative policy makers. The highest inflation that India has ever seen in the past two centuries was 53.8%

Zimbabwe:
A special reference.

Zimbabwe's inflation soared to a record high of 89,700,000,000,000,000,000,000% in Mid-2008 The Reserve Bank of Zimbabwe issued a ZWD 10,000,000 note in January 2008, roughly equivalent of 4 US dollars. As of 2012, Zimbabwe still has no national currency; currencies from other countries are used.

Control Measures

Monetary Policy:
During Inflation Central Bank:
Sells securities in Open Market Operation Increase the bank rate known as Dear Money Policy (currently 6% in India) Increase the Cash Reserve Ration Increase the Statutory Liquidity Ratio Increase the Repo rate (currently 7.50% in India) Increase in Reverse repo Rate (currently 6.50% in India)

Fixed Exchange Rates:

Under a fixed exchange rate currency regime, a country's currency is tied in value to another measure of value such as gold. In this monetary system a region's common media of exchange are paper notes that are normally freely convertible into pre-set, fixed quantities of gold.

Fiscal Policy:
Fiscal policies are effective in increasing the leakage rates from the circular income flow, thereby rejecting all further additions into this particular flow of income.

Present Scenario

Courtesy
1. 2. 3. 4. En.Wikipedia.org CIA The World Factbook Answers.yahoo.com General economics (CPT)

Questions, Anyone?