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Civil Service Institute

COURSE: MACRO ECONOMICS


Class: C
GROUP ASSIGNMENT
Group Members
1.Mustafe Abdirizak Ahmed
2. Abdikarim Ismail Mohamed
3. Osman Ali Cise
4. Abdihakim Ibrahim Saed
5. Mubarik Khadar Ali
6. Abdirahman Abdillahi Farah
7. Aydarus Mowlid Abdi
8. Mohamed Abdillahi Egeh
9. Abdillahi Abdi Hassan.
10. Abdicasis Ibrahim Ahmed
Our Assignment Group QUESTION
Question 4: Inflation and deflation have a side effect of economic growth
in many ways.

A. Explain the effect of Inflation to the consumer?

B. And Investors?

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Assignment Content
1. Introduction
1.1: Objectives
1.2: Introduction
1.3: Definition of inflation.
1.5: Inflation and Deflation.
1.4: types of inflation.
1.5: causes of inflation
1.6: results come from inflation.
1.7: controlling inflation
2. Body
2.1: Effect of inflation to the consumers
2.2: Effect of inflation to the investors
3. Conclusion
3.1: Recommendation

Objectives of Our Assignment Group

 To deeply understand the meaning, types and causes of inflation.


 To enhance our knowledge that we know the effects of inflation to economic
growth.
 To distinguish the difference between the inflation and deflation.
 to investigate in deeply the effects of inflation has to consumers and investors.
 To discuss in our group and share in our ideas towards our assignment question.
Meaning of Inflation
the term inflation is such a generic term used in many contexts, there is no
commonly accepted definition of inflation, nor is there a common agreement on what
constitutes acceptable levels of inflation, bad inflation, or hyperinflation.
Generally, it can be said that inflation is a measure of a general increase of the price
level in an economy, as represented typically by an inclusive price index, such as the
Consumer Price Index in the United States. The term indicates many individual prices
rising together rather than one or two isolated prices,
such as the price of gasoline in an otherwise calm price environment.
The inflation rate is typically expressed as an annual growth rate in prices (again, as
measured by an index) even if measured over a shorter period of time. For example, if
a radio report states that "consumer prices rose at an inflation rate of four percent last
quarter," that would typically mean than the Consumer Price Index for All Urban
Consumers (the most quoted index) rose over the last three months at an annualized
rate of around four percent, and the press would generally refer to the current inflation
rate as around four percent.
The term deflation refers to a general decline in prices or the price level as measured
by an inclusive price index and, again, is not a reference to isolated price declines, like

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natural gas declining in price, in an otherwise stable price environment.
During healthy economic times when the economy is experiencing neither inflation nor
deflation, a term like price stability might describe the economic pricing environment at
the time
Inflation in general terms means expansion.
Inflation is a rise in the general level of prices of goods and service in an economy
over a period of time. When the general price level rises, each unit of currency buys
fewer goods and services.
When the level of currency of a country exceeds the level of production, inflation
occurs.
Value of money depreciates with the occurrence of inflation.
Inflation is a rise in the general level of prices of goods and services in an economy
over a period of time.
Inflation also reflects erosion in the purchasing power of money.
Inflations effects on an economy can be positive or negative.
The rate of inflation is measured by the annual percentage change in the level of prices
as measured by the consumer price index.
Reduction in the purchasing power per unit of money a loss of real value in the medium
of exchange and unit of account within the economy
Definition of Inflation
In economics the Word inflation Refers to General rise in Prices Measured against a
Standard Level of Purchasing Power.
According to C.CROWHTER, “Inflation is state in which the value of money is falling
and the prices are rising”
According to Gregory “it is an increase in the quantity of purchasing power”
Johnson defines inflation “as the increase in the quantity of money faster that the
national output is expanding”
Inflation is the rate at which prices rise and purchasing power fails.
Inflation means there is a sustained increase in the price level.
Inflation occurs when the price of goods and service rise, while deflation occurs when
those prices decrease.
Inflation is the state when the value of money is falling and there is an upward rise in
price level.
Inflation is defined as a sustained increase in the price level or a fall in the value of
money
Inflation and Deflation
While inflation represents and overall upward price movement of goods and services,
deflation acts adversely. We take a look at the basics of both.
Inflation is a rise in the general level of prices of goods and services in an economy
over a period of time.
Deflation is: the opposite of inflation.
Deflation is a decrease in the general price level of goods and services.
Deflation occurs when the inflation rate falls below 0% (a negative inflation rate)

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Deflation is the result of the lack of aggregate demand in the economy, forcing
suppliers to cut prices to attract customers.
Deflation is the result of the lack of aggregate demand in the economy, forcing
suppliers to cut prices to attract customers.
Inflation lowers your standard of living if your income doesn't keep pace with rising
prices (and it rarely does). However, if inflation is around 2 percent, then people buy
things now before prices go up in the future. That can spur economic growth.
Inflation and deflation have entirely different effects upon an economy so they will
be considered separately
Types of Inflation
on the basis of speed or intensity,
there are four main types of inflation, categorized by their speed.

1. Creeping,
 in the initial stage of the inflation, prices rise at a very low rate, this mild rate
inflation may be referred to as creeping inflation
 If the speed of upward thrust in prices is slow but small then we have creeping
inflation.
 Creeping or mild inflation is when prices rise 3 percent a year or less.
2. Walking,
 When the price is moderate. It is warning signal for the government to control it
before it turns into running inflation
 If the rate of annual price increase lies between 3 percent and 4 percent. Then
we have the situation of walking inflation.
3. Running inflation
 a rapid acceleration in the rate of rising price more than 10 percent per annum is
referred as running inflation.

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 When inflation rises to 10 percent or more, it wreaks absolute havoc on the
economy. Money loss value so fast that business and employee income can’t
keep up with costs and prices.
4. Galloping inflation
 When the monetary authorities lose control over the running inflation, it may
result into hyper inflation. This is the final stage of inflation, where there is no
limit to which the price level may rise.
Example of hyperinflation includes Germany in the 1920s, Zimbabwe in the
2000s, and American during its civil war.

On the basis of causes


1.Currency inflation
this type of inflation is caused by the printing of currency notes.
Inflation caused by excessive flow of currency money is called currency inflation. It
occurs when the government issues more currency without a corresponding legitimate
demand to buy goods and services.
2.Credit inflation:
Being profit making institutions’, commercial banks sanction more loans and advances
to the public than what the economy needs, such credit expansion leads to a rise in
price level.
Banks create credit on the basis of primary deposits of the customers or derivative
deposits generated from the loans and advances extended by the banks. Expansion of
credit money leading to an increase in the money supply unaccompanied by rise in
production originates
credit inflation.
3.Deficit induced inflation
the budget of the government reflects a deficit when expenditure exceeds revenue. To
meet this gap, the government may ask the central bank to print additional money.
Since pumping of additional money is required to meet the budget deficit, any price
may the be called deficit induced inflation.
When the expenditure of the government exceeds its revenue, the gap is filled through
deficit financing. It will cause increase in the money supply, whatever technique may be
adopted for this purpose. This type of inflation resulting in increase in the prices is also
called budgetary inflation

Causes of inflation
There are two main causes of inflation
the most common cause of inflation is
1. Cost-push inflation: or other times called supply shock inflation:
when the companies create inflation when they raise their prices to cover higher supply
prices and maintain margins.
Increase in cost of production.

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Entrepreneur due to their monopoly position raise the profit margin on goods

2. Demand-pull inflation:
 is the most common, it is when demand for a good or service increases so much
that it outstrips supply.
 That prices increase when demand for goods and services exceed their supply.
When demand grows faster than supply it pushes general prices up, this can be
described as “too much money cashing too few goods”
Inflation caused by increasing in aggregate demand.
Factor
increase in money supply
increase in the demand for goods by the govt.
increase the income of various factor of production
The other factors caused inflation include
1. The Money Supply
Inflation is primarily caused by an increase in the money supply that outpaces
economic growth
2. The National Debt
we all know that high national debt in the U.S. is a bad thing, but did you know
that it can actually drive inflation to higher levels over time? The reason for this
is that as a country’s debt increases, the government has two options: they can
either raise taxes or print more money to pay off the debt.
3. Exchange Rates
Inflation can be made worse by our increasing exposure to foreign marketplaces.
In America, we function on a basis of the value of the dollar. On a day-to-day
basis, we as consumers may not care what the exchange rates between our
foreign trade partners are, but in an increasingly global economy, exchange rates
are one of the most important factors in determining our rate of inflation.
Printing more money: if the central bank prints more money, you would expect to
see a rise in inflation.
This is because the money supply plays an important role in determining prices.
Increase in disposable income
Foreign exchange reserves
erratic agriculture growth
inadequate industrial growth.
Increase in population
expansion of bank credit

The results comes when inflation occurs


 The decreased purchasing power of the rupee.
 An increase in the general level of prices.
 Decrease in the purchasing power of the currency.

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 High or unpredictable inflation rates are regarded as harmful to an overall
economy.
 Negative impacts to trade from an increased.
 Price increase can worsen the poverty affecting the low income households.
producers will not be able to control the cost of raw material and labor

Controlling inflation
there are broadly two ways of controlling inflation in an economy
1. Monetary measures
2. Fiscal measures. And also other measures
1.monetary measures
the most important and commonly used method to control inflation is monetary policy
of the central bank. Most central banks use high interest rates as the traditional way to
fight or prevent inflation.
Monetary measures used to control inflation include
bank rate policy (interest rate increase)
contraction money supply
open market operation

2.Fiscal measures
fiscal measures to control inflation include taxation, government expenditure and public
borrowings.
Fiscal measures used to control inflation include
increase in taxes
increase in savings

3. Others measures
to increase production
price control

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Effects of inflation to the Economic Growth
inflation effects economies in various positive and negative ways.

Benefits
debtors
entrepreneurs
farmers
upper income groups

loses
creditors
fixed income groups
consumers
middle and lower income groups

Effects of inflation to the consumers


As we know inflation causes uncertainty to increase which can erode business and
consumer confidence, so the drop-in confidence can reduce investment and
consumption which produce downward pressure on employment
and production
There are two ways to measure the effects of inflation on the redistribution of income
and wealth in a society. First, on the basis of the change in the real value of such factor
incomes as wages, salaries, rents, interest, dividends and profits.
Second, on the basis of the size distribution of income over time as a result of inflation,
i.e. whether the incomes of the rich have increased and that of the middle and poor
classes have declined with inflation. Inflation brings about shifts in the distribution of
real income from those whose money incomes are relatively inflexible to those whose
money incomes are relatively flexible.

 It is difficult for consumers to purchases more goods.


 It generates very bad effects on the poor labor force.
 Inflation reduces the living standard and purchasing power of people.
 It is harmful for creditors.
 Inflation reduces the purchasing power.
 When Zero inflation the effect has consumers are no effected at all.
 When mild inflation the effect has consumers affected but not much, Demand
may be same.
 When High inflation the effect has consumers affected much, Demand may be
lower in many products.
 Savers see the real value of their savings eroded

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 In other hand the consumers stand at the loosing end, while the producers
having old inventories may gain form the inflation, and also people with fixed
income group are the worst sufferers of inflation.
 High inflation may lead to shortages of goods if consumers begin hoarding out of
concern that prices will increase in the future.

.Effects of inflation to the investors


People who put their money in shares during inflation are expected to gain since the
possibility of earning of business profit brightens. Higher profit induces owners of firm
to distribute profit among investors or shareholders
Persons who hold shares or stocks of companies gain during inflation. For when prices
are rising, business activities expand which increase profits of companies. As profits
increase, dividends on equities also increase at a faster rate than prices. But those who
invest in debentures, securities, bonds, etc. which carry a fixed interest rate lose during
inflation because they receive a fixed sum while the purchasing power is falling.
Inflation and Its Impact on Investments. Understanding inflation is crucial to
investing because inflation can reduce the value of investment returns.
Inflation affects all aspects of the economy, from consumer spending,
business investment and employment rates to government programs, tax policies, and
interest rates.
Inflation is also a concern to investors, since changes in inflation and interest rates
affect various asset types in different ways. This is an especially important issue for
people living on a fixed income, such as retirees
Fixed-income (i.e. bond) investors are the hardest hit by inflation.
It is argued that countries with higher inflation rates tend to have lower investment and
therefore lower economic growth, and also if there are poor levels of investment this
could lead to higher unemployment in the long term
Inflation causes productive investment to fall because profitability falls, speculative
investment rises which has a negative effect on employment, output and income there
for inflation causes resources to be misallocated

Conclusion
in reality, low inflation rate and an upward economic growth is never possible.
Nevertheless, low inflation rate means slow economic growth, whenever, money is in
excess, there is bidding by the consumers due to which the cost of goods escalate.

Recommendations
 controlled by strategic planning with inflation.
 Domestic production should be encouraged
 Development in agricultural sector
 Strong monitoring system on different levels

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References

 Abel, Andrew; Bernanke, Ben (2005). "Macroeconomics" (5th ed.). Pearson.


Measurement of inflation is discussed in Ch. 2, pp. 45–50; Money growth &
Inflation in Ch. 7, pp. 266–269; Keynesian business cycles and inflation in Ch. 9,
pp. 308–348.
 Barro, Robert J. (1997). Macroeconomics. Cambridge, Mass: MIT Press. p. 895.
ISBN 0-262-02436-5.
 Blanchard, Olivier (2000). Macroeconomics (2nd ed.). Englewood Cliffs, N.J:
Prentice Hall. ISBN 0-13-013306-X.
 Mankiw, N. Gregory (2002). "Macroeconomics" (5th ed.). Worth. Measurement of
inflation is discussed in Ch. 2, pp. 22–32; Money growth & Inflation in Ch. 4, pp.
81–107; Keynesian business cycles and inflation in Ch. 9, pp. 238–255.
 Hall, Robert E.; Taylor, John B. (1993). Macroeconomics. New York: W.W.
Norton. p. 637. ISBN 0-393-96307-1.
 Burda, Michael C.; Wyplosz, Charles (1997). Macroeconomics: a European text.
Oxford [Oxfordshire]: Oxford University Press. ISBN 0-19-877468-0.

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