Abstract: This chapter discusses the cause and effects of inflation. Inflation is commonly defined as a continuous rise in the price level or a falling purchasing power of money. Inflation is caused by a rate of growth of the nominal money supply that exceeds the growth of the demand for real money balances. So-called nonmonetary theories of inflation frequently confuse changes in relative prices with changes in the overall level of prices. Cost push or monopolistic forces that work on the economy as a whole affect the price level indirectly by lowering the rate of growth of real income. The latter, in turn, leads to a slowing of the rate of growth of the demand for real money balances. Excessive growth of money is the proximate cause of inflation. The tight monetary policies create recessions and unemployment, conditions that create political pressures for the authorities to revert to easy monetary and fiscal policies. As inflation is only partially moderated during the recession period, each recovery starts from a higher inflation base than did the previous recoveries. Inflation pushes people into higher income-tax brackets and raises the effective personal income-tax rate on real income when tax brackets are unindexed for inflation. It also increases effective rates of taxation on business profits and thereby reduces the rate of return on capital income.
Publication Year: 1982
Publication Date: 1982-01-01
Language: en
Type: book-chapter
Indexed In: ['crossref']
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Cited By Count: 6
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