Causes and Solutions of Inflation in the Global Economy

ECONOMICS1
Economics Policy and the Global Environment
By (Name)
Course
Instructor’s Name
Institutional Affiliation
The City and State
Date

ECONOMICS2
Question one (1)
Introduction
Inflation is a situation where the prices of commodities and services within an economy
keep on increasing at a given period. Inflation is one of the world’s greatest problems that
hinders economic growth and development of a given economy. Inflation rate can be of various
types which include, creeping inflation, walking inflation, hyper inflation among others.
Countries suffer from inflation which is majorly caused by a political war, breakdown of
industries, printing of too much money (Nelson, 2018).
Severe political wars among countries are the major causes of inflation in the world.
These wars have led to destruction of industries and death of people causing misery, and loss of
property among people (Morrissy, 2011). This has sparked off a sharp inflation brought about by
high costs of production in the industrial sectors. Furthermore, high demand of goods and
services especially in developing countries of the world that exceeds the available supply causes
inflation. In an economy where the demand for goods by people is high like that of Venezuela,
Angola and South Sudan, the inflation rate is usually high. This is because an excessive demand
for goods and services by the consumers will force the producers and sellers to raise the prices
for these goods and services hence inflation in the economy (Floyd, 2018).
In addition, importation of goods from countries already experiencing inflation is a cause
of inflation in Venezuela. Countries such as India and China where Venezuela imports her
commodities also do have high rates of inflation. This therefore means that Venezuela gets
imported inflation direct from these countries (Morrissy, 2011).

ECONOMICS3
Furthermore, exchange rates may be a cause of inflation among countries in the world.
Since the commonly used currencies in the world are US dollars and Euros, any fluctuation in
these currencies affects other countries’ currencies (Nelson, 2018). High interest rates usually
attract foreign investors to a country and this increases demand for local currency thus an
increase in the rate of inflation. On the other hand, low interest rates by commercial banks
discourage investment and in turn the demand for local currency reduces causing a deflation
among countries.
Increased printing of money, when central banks print more money, the circulation of
money within countries will be high. This will call for an increase in demand for goods and
services leading to a type of inflation known as demand-pull-inflation. However, reducing the
amount of money printed within the country by the central bank in turn reduces the demand for
good s and services thus curbing inflation in the world. Also, increased bank lending causes
inflation (Floyd, 2018). The rate of inflation becomes high in an economy if the rate of bank
lending increases. This is as a result of increased money supply in the country. People always
tend to borrow more from commercial banks in cases where the interest rates are low. However,
when commercial banks reduce their rate of lending to the public, the inflation rate also
decreases in since few people will be given loans (Bagus, 2014).
Natural calamities, these are unforeseen happenings such as flooding, drought, landslides
among others. Natural calamities may lead to destruction of property and break down of
industries like manufacturing industries and agricultural industry. This leads to a sharp increase
in the cost of production and hence an increase in the prices of goods within the countries which
causes inflation in turn (Specia, M. 2019).