Inflation and Its Causes
Inflation has been as a result of rapid increase in the quantity of money or general supply of money in the economy. Inflation has occurred in several different countries. By the nineteenth period, the economist has been able to separate various factors which cause increase or fall of the price of a given commodity. Some of the key factors include a change in the cost of production as well as the price of commodities. Economics focused more on choices as well as decisions with the key aim of managing the scarce resources that are available in the country. For that reason, micro-economics is one of the branches of the economy which involves decisions that are made within an individual level. Such decisions can include, companies firms evaluating given resources and making sure there are tradeoffs.
The Impact of Inflation on the United States Economy
On the other hand, the economy involves a marketplace or the economic system in which choices are interlinked with another one. Therefore, inflation is considered to be a critical aspect for any other country. It can be related to the way in which the country conducts its business with others. The persistent increase in the price of goods can be regarded to influence on how commodity is being sold in the market. Inflation is more likely to influence the United States of the American economy. For that reason, the paper will analyze the impact of inflation on the United States of the American economy and finally conclude.
The Role of Inflation in Borrowing Funds
Inflation can influence how a give a country borrows funds. Inflation raises the cost of borrowing. For the last few centuries, the United States of America has used a different approach to manage the issue of inflation. The key focus is to adopt a monetary policy. To do this, the Federal Reserve relies more on interlink between inflation as well as interest rates. In case the interest rate is too low, firms and individuals can borrow cheaply for them to start a given business (Baumol and Alan 22). In this way, low rates are more likely to encourage spending together with investing which in overall strengthen inflation in turn. However, when prices of commodities are too high, the government can take the initiative of borrowing more funds so that they can be able to offer products that are cheap. In the case where the government has funds to control the economy, they can provide services at a subsidized price, and this encourages spending among people.
Inflation and Currency Weakness
Inflation also weakens the currency of the United States of America. High level of inflation is usually related to slumping exchange rate. However, this is generally the scenario of weaker currency causing inflation. Economies that can be able to import many goods and services can pay for the imports in the local currency terms when their currency is below the trading partners. On the other hand, inflation can cause a high increase in the cost of commodity depending on the context of how the commodities are sold. Majority of the global economy is more important that the increase in the price of goods can cause weaker currency. For example, during Trump's election, the rising inflation increases the price of a dollar. The key reason was that the interest rate was too low. It was considered to be the lowest in country history. The weakening of the currency meaning the economy is not performing better.
The Impact of Inflation on Income and Employment
However, in most instances, inflation can also have an impact on income and employment level of a given country. Inflation tends to increase a given aggregated money income such as the national income of the society as a whole as a result of higher spending as well as high level of production. Correspondingly, the volume of employment is expected to increase within the impact of the increased production.
Inflation and Government Finance
On the other hand, the real income of individuals might fail to increase proportionately as a result of the decrease in the purchasing power of money. Also, in the current context of low growth, high unemployment in the country and deflation has caused an increase in the price of goods which affect the country's economy negatively. Also, when the level of growth is too low, unemployment is regarded to be high, and the majority of people are not able to cater for their needs effectively and as required, then the same person can attest of all what is being alleged here as also supported in figure below.
Figure 1: The rate of unemployment for the year 2012
A look at the growth in jobs also gives the same picture as presented in the above figure 1. Depending on the time where one is inferring to, Irwin concurred that one can still proceed with the argument that from the time of election of Trump, economic growth has been somehow very slow or also faster when compared to his predecessors. However, the growth in the economy just follows the pace of the past regimes before him (Tanner 8).
Spending and Investing Amidst Inflation
The United States of America has been spending more due to high increase in level of inflation in the country. Unexpected response to reduced purchasing power is for the consumers to buy products when price is low. Cash can only lose its value if the level of exchange is too high. Hence it is important to stock products that are considered to be important. For the buyers or consumers it means ensuring they have all the commodity they need. And for the business, it means they are able to make capital investment, that under a given situation it might be considered for further investment. Several investors might purchase goods when inflation is too high, but the assets might cancel the key benefits particularly in short term perspectives. According to bureau of statistics, the graph below illustrates the level of inflation in the United States of America.
Inflation and Government Finance
The level of inflation has also been interlinked to impact the government finance. During the period of inflation, the federal government revenue spending increases as they obtain ore revenue from the sales tax. Similarly, public spending increases since the government is required to spend more for the administrative purposes. The rising or increasing prices reduces the real burden for the public debt because the specific amount is expected to be paid within the particular period. On the other hand, inflation can be interlinked to growth of the country. A mild inflation is considered to encourage economic growth, but the runaway inflation obstruct economic growth as it increases the cost of development of a given economy. High level of inflation mostly lowers the growth level of a country by reducing the rate of capital formation and result in uncertainty. The government spending is as a result of increase in demand of healthcare in the United States of America. Majority of old people have put more pressure for the government to ensure there is social security and other programs.
The Impact of Inflation on Government Spending and Unemployment
Conclusively, inflation can result in too much spending by the government. This is because the federal government borrows funds to be able to provide services to the general public. Also, inflation can also cause a high rate of unemployment. This is because many firms can lay off staff due to low demand for services by the people. Therefore, state and local government are required to take the initiative towards ensuring the issue of inflation is managed in an effective way.
Works Cited
Bradley, D.; E. Huber; S. Moller; F. "Determinants of Relative Poverty in Advanced Capitalist Democracies". American Sociological Review. 68 (2013): 22–51
Baumol, William J. and Alan S. Blinder. Macroeconomics: Principles and Policy, Tenth edition.
Thomson South-Western.2016.Print
Fischer, Stanley. The Role of Macroeconomic Factors in Growth. Journal of
MonetaryEconomics 32,(2012).pp. 485-512
Irwin, Neil. "How Good Is The Trump Economy, Really?." Nytimes.com. N.p., 2018. Web. 24 Nov. 2018.
Smialek, Jeanna. "Trump Says The U.S. Economy Is The ‘Greatest’ Ever. It’S Not." Bloomberg.com. N.p., 2018. Web. 24 Nov. 2018.
Smeeding, T.M. "Public Policy: Economic Inequality and Poverty: The United States in
Comparative Perspective". Social Science Quarterly. 86(2014):pp. 955–83
Tanner, Michael D. "Who's Really To Thank For Booming Economy: Donald Trump Or Barack Obama?." Usatoday.com. N.p., 2018. Web. 24 Nov. 2018.
