Inflation and Its Effects on Investment Essay -- Finance Financial Eco

Inflation and Its Effects on investiture For world economic markets, pretension is a fairly new feature as for much of the pre-twentieth century there had been little upward drag on prices payable to gold and other(a) metallic standards. These backed currencies peculiar(a) governments abilities to create new specie. So at the end of the gold standard strong political pressures often caused governments to issue more money change magnitude the money supply and therefor the price level.Inflation reflects a posture where the demand for goods and services exceeds their supply in the economy(Hall, 1982). Its causes could be triggered by the head-to-head sector and the government spending more than their revenues, or by shortfalls in output. Price increases could also be triggered by increases in costs of production. For fount increases in prices of imported raw materials will cause inflation if non managed. Whatever the initial cause, inflation will not persist un sligh t go with by sustained increase in money supply. In this sense, inflation is a monetary phenomenon. But what effect does inflation have on the economy and on investment in particular? Inflation causes galore(postnominal) distortions in the economy. It hurts people who are retired and living on a fix income. When prices rise these consumers cannot buy as much as they could previously. This discourages savings due to the fact that the money is worth more presently than in the future. This prevision reduces economic growth because the economy needs a certain level of savings to finance investments which boosts economic growth. Also, inflation makes it harder for artes to plan for the future. It is very touchy to decide how much to produce, because businesses can... ...hem to make financial decisions. If people cannot trust money then they are less likely to engage in business relationships. This results in lower investment, production and less socially positive interact ions. Among other effects, people may start to attempt to trade by other, less efficient, means in order to avoid the unpredictable price levels due to inflation. BibliographyBlume, Marshall. Inflation and Capital Markets. Ballinger, Cambridge, 1978.Hall, Robert ed. Inflation, Causes and Effects. University of Chicago Press, Chicago, 1982.Hellerstein, Rebecca. The Impact of Inflation, Regional Review, Winter 1997, Vol. 7, no. 1.Massimo, Caruso. Investment and the Persistence of Price Uncertainty, Research in economics, Vol. 55, June 2001.Morley, Samuel. The economics of Inflation. Dryden Press, Hinsdale, Ill., 1971.