If country is experience inflation then what must decrease
Answers
5 Main Cause Of Inflation
1. Erodes Purchasing Power
This first effect of inflation is really just a different way of stating what it is. Inflation is a decrease in the purchasing power of currency due to a rise in prices across the economy. Within living memory, the average price of a cup of coffee was a dime. Today the price is closer to two dollars.
2. Encourages Spending and Investing
A predictable response to declining purchasing power is to buy now, rather than later. Cash will only lose value, so it is better to get your shopping out of the way and stock up on things that probably won't lose value.
For consumers, that means filling up gas tanks, stuffing the freezer, buying shoes in the next size up for the kids, and so on. For businesses, it means making capital investments that, under different circumstances, might be put off until later. Many investors buy gold and other precious metals when inflation takes hold, but these assets' volatility can cancel out the benefits of their insulation from price rises, especially in the short term.
3. Causes More Inflation
Unfortunately, the urge to spend and invest in the face of inflation tends to boost inflation in turn, creating a potentially catastrophic feedback loop. As people and businesses spend more quickly in an effort to reduce the time they hold their depreciating currency, the economy finds itself awash in cash no one particularly wants. In other words, the supply of money outstrips the demand, and the price of money – the purchasing power of currency – falls at an ever-faster rate.
When things get really bad, a sensible tendency to keep business and household supplies stocked rather than sitting on cash devolves into hoarding, leading to empty grocery store shelves. People become desperate to offload currency, so that every payday turns into a frenzy of spending on just about anything so long as it's not ever-more-worthless money.
4. Raises the Cost of Borrowing
As these examples of hyperinflation show, states have a powerful incentive to keep price rises in check. For the past century in the U.S. the approach has been to manage inflation using monetary policy. To do so, the Federal Reserve (the U.S. central bank) relies on the relationship between inflation and interest rates. If interest rates are low, companies and individuals can borrow cheaply to start a business, earn a degree, hire new workers, or buy a shiny new boat. In other words, low rates encourage spending and investing, which generally stoke inflation in turn.
5. Lowers the Cost of Borrowing
When there is no central bank, or when central bankers are beholden to elected politicians, inflation will generally lower borrowing costs.
Say you borrow $1,000 at a 5% annual rate of interest. If inflation is 10%, the real value of your debt is decreasing faster than the combined interest and principle you're paying off. When levels of household debt are high, politicians find it electorally profitable to print money, stoking inflation and whisking away voters' obligations. If the government itself is heavily indebted, politicians have an even more obvious incentive to print money and use it to pay down debt. If inflation is the result...............
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