Essay on Increase of price

In ordinary usage, price is defined as the quantity of payment or compensation given by one party to another in return for goods or services generally expressed in units of currency. Rise in the general level of prices of goods and services in an economy over a period of time are called inflation. When the general price level rises, each unit of currency buys fewer goods and services. The main cause of inflation is excessive growth of the money supply than the rate of economic growth. 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. Inflation's effects on an economy are of two types: positive and negative. Positive effects include ensuring central banks can adjust nominal interest rates and encouraging investment in non-monetary capital projects. Negative effects of inflation include a decrease in the real value of money, discouragement of investment and savings, shortages of goods. A low positive inflation is usually favourable, as deflationary conditions are seen as dangerous for the health of 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 the size of the money supply through the setting of interest rates, through open market operations, and through the setting of banking reserve requirements. A variety of policies have been used to control inflation. To elucidate a few: 1. High interest rates and slow growth of the money supply. 2. Reducing aggregate demand during economic expansions and increasing demand during recessions to keep inflation stable for wage and price controls. 3. Keeping a fixed exchange rate currency regime to prevent a government from using domestic monetary policy in order to achieve macroeconomic stability. 4. Having the gold standard is a monetary system in which a region's common media of exchange are paper notes that are normally freely convertible into pre-set, fixed quantities of gold. 5. Maintain cost-of-living allowance. The real purchasing-power of fixed payments is eroded by inflation unless they are inflation-adjusted to keep their real values constant. 6. Penalty units: If laws are written with actual monetary values, and inflation occurs, then those values can fall behind, and make the values trivial. It would take a lot of effort to rewrite all the laws to keep up with inflation. A better way is to define all fines in terms of Penalty units, and redefine that the single PU value as required.