INFLATION AND EURO CURRENCY

Inflation and Euro currency

Economics

Inflation

In economics, inflation is an increase of the average price level in the economy and property. Pure inflation is a special case, which occurs when the prices of goods and factors of production are increasing at the same rate. In other words, the phenomenon of inflation is in a situation where the amount of money in circulation is rising faster than the value of the goods and services offered for sale (Temperton, 1998). This state of affairs leads consequently to an increase in prices and a drop in the value of money at the same rate.

Effects of Inflation

The effects of inflation are diverse in the economy and can be both positive and negative. Due to the presence of inflation, the real value of income disappears and all that we have. This leads to an increase of the nominal value of earned income, but in fact reduces their real value, causing a decline in their purchasing power (Wilson, 1961). It should be noted that not all price increases can be considered inflation. Prices of some goods on the market can get more expensive, while others at the same time decrease, the rate of change of these prices can be different and you should not automatically associate this situation with the phenomenon of inflation. Price movements in this situation can only change the price structure in the market and this can be normal for a properly functioning market economy.

With increase in the common level of prices, every unit of the currency buys fewer goods and services, i.e., reduces the purchasing power of the currency. This, undoubtedly, is the most outstanding overall effect of inflation (Bennett, 2006).

Negative effects

High inflation considered as the unpredictable inflation where the rates are considered as harmful for the overall economy as improbability about the future purchasing power does not encourage investment and savings. For example, companies will cost them stick to a budget or design a long-term plan. High inflation can also be reflected in an increase hidden taxes since earnings inflated by inflation will increase the income tax, unless the rate of these taxes is subject to inflation (Temperton, 1998).

High inflation also shifts the purchasing power of those with fixed nominal incomes to those with variable incomes in certain cases can keep swiftness with inflation. This relocation of purchasing power is also reflected internationally as it will make the exports may become more expensive and affect the trade balance. Other negative effects of inflation are:

Cost inflation: high inflation or expectations may encourage demand for higher wages to keep pace with rising consumer prices and the cost of living in general. In extreme can cause a spiral in which inflation generates rising wages, which promotes consumption and inflation to continue rising (Sarel, 1996).

Hoarding: This phenomenon occurs when consumers begin hoarding durable and / or non-perishable items to avoid short-term losses expected monetary value.

Social unrest: High rates of inflation to which the population cannot keep up cause ...