People complain that inflation increases the cost of goods and services and therefore reduces their purchasing power. If inflation and income grow at the same rate, is this complaint valid? Explain your answer.

Question

Beckham Delgado

Social Studies

7 March, 07:43

People complain that inflation increases the cost of goods and services and therefore reduces their purchasing power. If inflation and income grow at the same rate, is this complaint valid? Explain your answer.

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Reed Garza · Answer 1

Yes it is valid because people will not have much.

Inflation is the persistent and widespread increase in the value of prices. When inflation reaches zero, we say that there was price stability.

Inflation can be divided into:

Demand Inflation

It is when there is excess aggregate demand in relation to available production. The chances of demand inflation occurring increase when the economy produces close to the use of resources.

For demand inflation to be combated, economic policy must be based on instruments that reduce aggregate demand.

Cost Inflation

It is associated with supply inflation. The level of demand remains and costs rise. With the increase in costs there is a retraction in production causing the market prices to also increase. The most common causes of cost inflation are: wage increases cause the unit cost of a good or service to increase; the increase in the cost of raw material that causes a super increase in production costs, causing the final cost of the good or service to increase; and, finally, the market structure that some companies increase their profits above rising production costs.