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While mentioned earlier in the essay, there was never an in-depth discussion on inflation with respect to income, prices, and cost of living. This phenomenon is technically defined as a general rise in prices measured against a standard level of purchasing power. In other words, a consumer will get be getting less for his money. . “Inflation is a dual process. It unavoidably has a monetary dimension. But at the same time, prices are determined by costs, meaning that social conflicts over values of inputs such as the nominal wage and exchange rates and the rules for contract indexation combine to force up the price level.

” At the upper echelons of society, inflation does not matter very much because consumer goods do not comprise such a large percentage of the individual’s income, however, for lower income people, the consequences of inflation are much more severe. Taking certain goods and measuring them at two different points in time, then comparing price to quality usually measure inflation. The most often used are the Consumer Price Index, which measures consumer prices, and the GDP deflator, which monitors inflation in the entire economy.

Higher prices for the same or lower quality is surely a symptom of this. Originally, inflation used to refer to the increase in the monetary supply, where the prices are increased to keep pace with the amount of money printed so that the dollar does not lose its value on the world market. There are, therefore, many measures of inflation depending on the specific circumstances. From an economist’s point of view, inflation is closely correlated with interest rates. One aspect that affects the wealthy is the inflation tax.

When cash holders of foreign currencies get an increase, the U. S. government taxes this gain. If the annual inflation rate in the United States is 5%, one dollar will buy $1 worth of goods and services this year, but only 95? the next year; this has the same effect as a 5% annual tax on cash holdings. An inflation tax does not necessarily involve debt emission. By simply emitting currency (cash), a government will induce liquidity and may trigger inflationary pressures. Taxes on consumer spending and income will then collect the extra cash from the citizens.

Inflation, however, tends to cause social problems when income grows much more slowly than prices. “An alternative neoclassical/monetarist adjustment story relies on significant real estate balance effects, via which price increases reduce the real value of the money stock. Money-holders increase their saving to reconstitute their wealth. Demand falls in parallel with forced saving, but due to redistribution of wealth instead of income. The inflation tax is a dynamic version of this story.

” In such a society, rates of consumerism go down as people will have to set aside more money simply to survive. More problems of inflation are: those on a fixed income will be worse off due to higher prices without concurrent rise in income, generate a wage spiral when unions demand higher wages, and exports would be more expensive leading to eventual trade deficits. Therefore, nominal income does not mean very much when all economic factors are taken into account. Bibliography Pontusson, Jonas.

Inequality and Prosperity: Social Europe vs. Liberal America. New York: Cornell University Press, 2005 Rothschild, Kurt Wilhelm. Employment, Wages and Income Distribution: Critical Essays in Economics. NY: Routledge, 1993 Ryscavage, Paul. Income Inequality in America: An Analysis of Trends. New York: M. E. Sharpe, 1999. Tanzi, Vito and Ke-Young Chu. Income Distribution and High-Quality Growth. MA: MIT, 1998 Taylor, Lance. Income Distribution, Inflation, and Growth: Lectures on Structuralist Macroeconomic Theory. MA: MIT, 1991

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