Namangan state university course: theory of economics


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NAMANGAN STATE UNIVERSITY

COURSE: THEORY OF ECONOMICS

COURSEWORK

On the topic of _______________________________________

____________________________________________________

By _________________________________________________

Faculty: ____________________ Group:__________________ ASSESSED BY_____________________________

Date of presenting

to review:

“___” ______202__





Reviewed and assessed date:

“___” _______202__




Coursework defence date:

“___” ______202__

Grade: “______”

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(signature)

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Commission members:

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NAMANGAN-2021

PLAN:

Introduction

Main body

2.1 Understanding Inflation.

2.2 History of inflation.

2.3Causes and types of inflation.

2.4 Pros and Cons of Inflation.

2.5 How to combat against inflation.

Conclusion



References

Generall background of INFLATION.

In economics, inflation (or less frequently, price inflation) is a general rise in the price level in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy The opposite of inflation is deflation, a sustained decrease in the general price level of goods and services. The common measure of inflation is the inflation rate, the annualized percentage change in a general price index, usually the consumer price index, over time.

Economists believe that very high rates of inflation and hyperinflation are harmful, and are caused by an excessive growth of the money supply. Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities.  However, the consensus view is that a long-sustained period of inflation is caused by money supply growing faster than the rate of economic growth.

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, allowing the central bank more leeway in carrying out monetary policy, encouraging loans and investment instead of money hoarding, and avoiding the inefficiencies associated with deflation.

Most economists however agree that the cause of this "price inflation" (or shrinking dollar) is "monetary inflation" or the excessive growth of the money supply. They say "excessive growth" because many economists believe that the money supply needs to grow some.

The reason they think it needs to grow is to offset the growth in the Gross Domestic Product (GDP). If the money supply didn’t grow and the GDP did... prices would actually decline (each dollar would buy more). This "horrible" event would benefit savers as their savings allowed them to purchase more and there would be less incentive to go into debt. But the "poor banks" would be hurt because people would be less inclined to borrow money and more inclined to save because the value of their savings would be growing rather than erroding.

But at the same time some others don’t think that is such a bad thing. Sound money that never changes has historically produced the greatest real economic booms. You can not borrow your way to wealth. You can only pretend to be wealthy for a while until reality catches up with you. Currently we are experiencing the results of a false debt inspired boom.Today, 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.

While consumers experience little benefit from inflation, investors can enjoy a boost if they hold assets in markets affected by inflation. For example, those who are invested in energy companies might see a rise in their stock prices if energy prices are rising.Some companies reap the rewards of inflation if they can charge more for their products as a result of a surge in demand for their goods. If the economy is performing well and housing demand is high, home-building companies can charge higher prices for selling homes.In other words, inflation can provide businesses with pricing power and increase their profit margins. If profit margins are rising, it means the prices that companies charge for their products are increasing at a faster rate than increases in production costs.Also, business owners can deliberately withhold supplies from the market, allowing prices to rise to a favorable level. However, companies can also be hurt by inflation if it's the result of a surge in production costs. Companies are at risk if they're unable to pass on the higher costs to consumers through higher prices. If foreign competition, for example, is unaffected by the production cost increases, their prices wouldn't need to rise. As a result, U.S. companies might have to eat the higher production costs, otherwise, risk losing customers to foreign-based companies.

There are a few metrics that are used to measure the inflation rate. One of the most popular is the Consumer Price Index (CPI), which measures prices for a basket of goods and services in the economy, including food, cars, education, and recreation. Another measure of inflation is the Producer Price Index (PPI), which reports the price changes that affect domestic producers. The PPI measures prices for fuel, farm products (meats and grains), chemical products, and metals. If the price increases that cause the PPI to spike get passed onto consumers, it will be reflected in the Consumer Price Index. We will discuss about them later.


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