Essay on Inflation for SBI PO/ Clerk Mains 2018
Question: Write an Essay in about 250 words on ‘Inflation’.
Answer:
Inflation
Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. Inflation is generally measured in terms of Consumer Price Index (CPI), which tracks the prices of a basket of core goods and services over time. Central banks attempt to limit inflation — and avoid deflation — in order to keep the economy running smoothly.
Inflation affects economies in various positive and negative ways. The negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings, and if inflation were rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future. Positive effects include reducing unemployment due to nominal wage rigidity. It is believed that the high rates of inflation and hyperinflation are caused by an excessive growth of the money supply.
Most economists favor a low and steady rate of inflation. Low (as opposed to zero or negative) inflation reduces the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduces the risk that a liquidity trap prevents monetary policy from stabilizing the economy. The task of keeping the rate of inflation low and stable is usually given to monetary authorities. Generally, these monetary authorities are the central banks that control monetary policy through the setting of interest rates, through open market operations, and through the setting of banking reserve requirements.
Word Count – 254
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