Project report on inflation

Causes more Inflation

Unfortunately, in the face of inflation, the desire to spend and invest tends to increase inflation, producing a potentially disastrous feedback loop. People and businesses are spending more fast in order to limit the amount of time they hold their deteriorating money, resulting in an abundance of cash that no one wants. In other words, the supply of money exceeds demand, causing the price of money—the purchasing power of currency—to fall at an increasing rate. When things become truly bad, the reasonable habit of keeping business and household supplies stocked rather than sitting on cash devolves into hoarding, resulting in empty food store shelves. People grow frantic to get rid of their money, and every payday becomes a shopping frenzy.

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   Raises the Cost of Borrowing
   

States have a strong motive to keep price surges in check, as these examples of hyperinflation demonstrate. In the United States, monetary policy has been used to control inflation throughout the past century. The Federal Reserve (the United States' central bank) does this by looking at the relationship between inflation and interest rates. Companies and individuals can borrow cheaply to establish a business, obtain a degree, recruit new employees, or buy a gleaming new yacht if interest rates are low. In other words, low interest rates boost consumption and investment, which in turn fuels inflation.
Central banks can put a stop to these raging animal spirits by boosting interest rates. The monthly payments on that boat, or that corporate bond issuance, now appear a little out of reach. It is preferable to deposit money in a bank where it will generate interest. Money becomes scarce when there isn't as much of it floating around. Although central banks generally do not want money to grow more valuable, they do fear full deflation nearly as much as hyperinflation. Rather, they yank on interest rates in either way to keep inflation near a target level (generally 2 percent in developed economies and 3 percent to 4 percent in emerging ones). The role of central banks in regulating inflation can also be viewed through the lens of the money supply. If the money supply grows faster than the economy, the money will become worthless, resulting in inflation.

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