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What Is the Role of Inflation in Macroeconomics?

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  • Written By: Esther Ejim
  • Edited By: Kaci Lane Hindman
  • Last Modified Date: 19 November 2016
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The role of inflation in macroeconomics can mainly be seen in the manner in which inflation affects other macroeconomic factors like Gross Domestic Product (GDP), total national output, total national income, savings, market, consumption, governmental policies and investments. Inflation refers to a situation where the price of goods as well as the price of services in a country increases over a set time period. Macroeconomics analyzes the factors that affect the entirety of the economy.

One of the roles of inflation in macroeconomics can be seen in the manner in which various governments respond to inflation. This is usually through the enactment of macroeconomic policies meant to address any issues raised by inflation in the economy. These policies may be structured in such a manner that they will help slow the growth of inflation. This may be done through various fiscal policies, which put a curb on the amount of money the government spends on certain public programs like welfare and other public-oriented payments. The government may also choose to increase taxes or interest rates in order to discourage lending and encourage saving.

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The cost-push inflation is a direct effect of inflation in macroeconomics. This effect can be seen in the way companies respond to inflation. Most companies increase the price of their services or goods to compensate for the increase in raw materials, production and employee wages. Cost-push inflation could also be as a result of the fiscal policies of the government. When the government imposes higher taxes on companies and higher import duties, such companies pass on the cost to various consumers through a parallel increase in the price of goods and services.

Demand-pull inflation refers to the effect of inflation in microeconomics whereby inflation causes a reduction in the exchange rate in comparison to foreign currency. Such a reduction in the value of money affects importers in a negative manner because imports have a higher cost than exports due to the disparity in the value of the various currencies. Another effect of inflation in macroeconomics is the way in which it affects the purchasing power of consumers. Such consumers soon find out that money does not have the value it used to and that more money will be required to buy what cost less in the past. This may lead to agitations by employees for an increase in wages to compensate for the fact that their current wages do not go as far as they once did.

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