ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -When economy experiences inflation, i.e. when the price level of goods and services rises, the value of currency reduces. This means now each unit of currency buys fewer goods and services. It has its worst impact on consumers.

Detailed explanation-2: -Economists believe inflation is the result of an increase in the amount of money relative to the supply of available goods. While high inflation is generally considered harmful, some economists believe that a small amount of inflation can help drive economic growth.

Detailed explanation-3: -In an inflationary environment, unevenly rising prices inevitably reduce the purchasing power of some consumers, and this erosion of real income is the single biggest cost of inflation. Inflation can also distort purchasing power over time for recipients and payers of fixed interest rates.

Detailed explanation-4: -Rising inflation affects purchasing power by decreasing the number of goods or services you can purchase with your money. Investors must look for ways to make a return higher than the current rate of inflation.

Detailed explanation-5: -Demand-pull inflation As a result, demand for goods and services will increase relative to their supply, providing scope for firms to increase prices (and their margins – which is their mark-up on costs). At the same time, firms will seek to employ more workers to meet this extra demand.