ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Long-lasting episodes of high inflation are often the result of lax monetary policy. If the money supply grows too big relative to the size of an economy, the unit value of the currency diminishes; in other words, its purchasing power falls and prices rise.

Detailed explanation-2: -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-3: -Erodes Purchasing Power An overall rise in prices over time reduces the purchasing power of consumers, since a fixed amount of money will afford progressively less consumption. Consumers lose purchasing power whether inflation is running at 2% or at 4%; they just lose it twice as fast at the higher rate.

Detailed explanation-4: -Demand-Pull and Cost-Push Cost-push inflation occurs when it becomes more expensive to produce goods or provide services. This can be caused by rapidly increasing wages or material costs.

Detailed explanation-5: -Inflation reduces the purchasing power of the money. Inflation reduces unemployment. The price of goods and services become more expensive. An inflation rate of 2% to 3% is good for the economy but higher rates of inflation can be very bad for consumers and the economy of a nation.