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

flash and Its sheath on Investment For world economic markets, rising prices is a jolly new experience as for much of the pre-twentieth century there had been inadequate upward pressure on prices due to gold and other metallic-looking standards. These backed currencies limited governments abilities to create new money. So at the extirpate of the gold standard strong political pressures often caused governments to issue more(prenominal) money increasing the money supply and therefor the price level.Inflation reflects a situation where the demand for goods and services exceeds their supply in the economy(Hall, 1982). Its causes could be triggered by the private 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 instance increases in prices of imported raw materials will cause inflation if non managed. Whatever the initial cause, inflation will not persist unless accompanied 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 detail? Inflation causes many distortions in the economy. It hurts plenty who are retired and living on a fixed 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 this instant than in the future. This expectation 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 businesses to device for the future. It is very difficult 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 go in business relationships. This results in lower investment, production and less socially positive inter actions. Among other effects, people may start to attempt to transaction by other, less efficient, means in order to avoid the maverick 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.