Sample Economics Paper on Inflation

Inflation

Inflation occurs when there is a general upward trend in regards to an increase in the price of commodities. High inflation rates damage economic growth and prevent people from saving their money. However, inflation can also have an added advantage to the growth of an economy, especially when a country experiences a stagnation. Some of the benefits of inflation include adjustment of wages especially in cases where a company wants to increase the wages of productive employees (Pettinger, 2017). Secondly, inflation can boost the growth of an economy, especially when a country is facing a recession. Lastly, inflation allows people to spend money because deflation causes people to refrain from spending money because they believe that prices of goods will remain cheap in future. The disadvantages of inflation include the tendency to discourage investment especially when the rate of inflation is high. Also, inflation makes an economic to slack in regards to growth. Furthermore, inflation reduces the value of savings in banks. A country will benefit from inflation if it manages to keep the level of inflation low (Pettinger, 2017). The optimum level of inflation should be between 1% and 3%. Therefore, the degree of inflation should be positive because a negative inflation prevents the circulation of money. Furthermore, a negative inflation increases the value of debts. Individual who have debts will experience a decrease in their incomes because they have to pay more money to pay off their debts. Therefore, inflation rate should be positive but should not exceed 3%.

Many governments around the world have monetary policies that allow them to print money, which they will use to buy goods and services. For example, Canada has an inflation policy called the inflation-control target. The inflation policy was introduced by the government in 1991 to control inflation in the country (Bank of Canada, 2017). Through the policy, the government can keep inflation levels at 2%. The advantage of the inflation policy is that it prevents the value of debts to increase. Furthermore, the inflation policy enables the country to experience economic boom through the circulation of money. The main disadvantage of the policy is that the governments need to review the policy every five years because of changing economic needs. However, the inflation-control target policy is instrumental in facilitating economic growth because banks use the system to set favorable interest rates on loans. The rate of inflation in Canada was 1.5% in December 2016. However, the current rate of inflation is 1% (Trading Economics, 2017).  The rate of inflation will increase in the future because of government efforts to prevent deflation.

Zimbabwe is an example of a country that experienced high rates of hyperinflation. Hyperinflation occurred in the country because of the government’s efforts to confiscate land from white European settlers.  The country had to abandon the local currency and use foreign currencies to offset the effects of hyperinflation. According to Pettinger (2011), the rate of inflation reached a peak of 624% in the early 2000s. Some of the effects of hyperinflation in the country included a shortage of staff in hospitals and schools, lack of water resources in the capital city and the inability of residents to buy essential commodities, such food, and clothing. According to Pettinger (2011), hyperinflation commenced on March 2007 and ended on November 2008. Hyperinflation ended because of the country’s decision to redenominate the Zimbabwean dollar.

References

Bank of Canada. (2017). Monetary Policy. Retrieved from http://www.bankofcanada.ca/core-functions/monetary-policy/

Pettinger, T. (2011). Hyperinflation in Zimbabwe. Retrieved from http://www.economicshelp.org/blog/390/inflation/hyper-inflation-in-zimbabwe/

Pettinger, T. (2017). Inflation: advantages and disadvantages. Retrieved from http://www.economicshelp.org/blog/315/inflation/inflation-advantages-and-disadvantages/

Trading Economics. (2017). Canada Inflation Rate. Retrieved from https://tradingeconomics.com/canada/inflation-cpi