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Inflation and its Consequences

1.Explain the various types of inflation and its consequences.
2.Describe the difference between inflationary gap and deflationary gap.

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Cost-push inflation

Cost-push inflation occurs when prices of raw materials increase. This occurs when businesses decide to increase their prices to boost revenue. The consequence is a general increase in the price of all commodities thereby eroding the purchasing power of the consumers.

Demand pull or excess demand Inflation

Demand pull or excess demand Inflation occurs when supply of commodities and services cannot cope up with increase in the number of buyers. This is due to the fact that the situation was never predicted to happen. This usually occurs after every occurrence of natural phenomena like typhoon, flood, tsunami. The consequence is that the value of money depreciates.

Interest Rate Inflation

Interest rate inflation affects how much a company charges for its final goods sold. If a company has to borrow money to produce the goods, the interest rate the banks charge is taken into account. Suppose a company usually borrows money at a 5 percent rate. Because of factors outside ...

Solution Summary

The solution describes Cost-push inflation, Demand pull, Interest Rate Inflation, and Sectoral inflation including their consequences. Difference between inflationary gap and deflationary gap was also discussed.