Question

identify ways in which inflation has impacted you. Are these affects actually from inflation or relative price changes? What is the difference? How can you minimize the harm, or make the most, of these impacts in the future?

Answer 1

Inflation has impacted everyone and people face it in their everyday life. Inflation has impacted the purchasing power of the people. The goods that we consume has become more expensive than before. The clothing, transportation as well as fooding has become more expensive in the recent years.

These effects are both due to inflation as well as relative price change.

The difference between the two is that inflation is a monetary phenomenon that occurs due to the mismatch of the money supply and money demand in the economy. Whereas relative price changes occur due to demand and supply mismatch of the goods and services. The two terms are used in place of each other, which is wrong.

When we understand the difference between these two phenomenon we can understand the price changes in a better way.

When the overall money supply increases in the economy, we can study the market and expect that overall price level in economy would change, if the money demand is not going to increase. And thus, to minimise the harm, we can ask for higher interest rate in our savings and bonds etc to offset these costs.

We can shift to other substitute goods if the price change is relative and save the additional costs.

Thus, if we know the difference, we can save and invest in a better way and use our money resources in the most fruitful way possible.