Inflation and Economic Development
High levels of inflation will not promote economic development. Costs that continue to rise cause productive activities to be very unprofitable. So the capital owner usually prefers to use his money for speculative purposes.
Among other things this goal is achieved by the buyer of fixed assets such as land, houses and buildings. Because entrepreneurs prefer to carry out investment activities of this nature, productive investment will decrease and the level of economic activity decreases. As a result more unemployment will come into being.
Effects on Income (Equity Effect)
The effects on income are uneven, some are disadvantaged but some are benefited by inflation. Someone who gets fixed income will be disadvantaged by inflation. For example a person who earns a fixed income of 500,000.00 per year while the inflation rate of 10%, will suffer a loss in decline in real income for the inflation rate, which is 50,000.00.
Efficiency Effects
Inflation can also change the pattern of allocation of factors of production. This change can occur through an increase in demand for various types of goods which can then lead to changes in the production of certain goods, resulting in inefficient allocation of production factors.
Effects on Output (Output Effects)
In analyzing the two effects above (Equity and Efficiency Effects) an assumption is used that the output is fixed. This is done so that the effects of inflation on the distribution of income and the efficiency of certain outputs can be known.
Community Inflation and Prosperity
Aside from having adverse effects on the country's economic activities, inflation will also have the following effects on individuals for the community:
Inflation will reduce the real income of people with a steady income.
Inflation will reduce the value of wealth in the form of money.
Worsen the distribution of wealth.
Inflation
How to Prevent Inflation
By using Irving Fisher MV = PT, it can be explained that inflation arises because MV rises faster than T. Therefore, to prevent inflation, one of the variables (M or V) must be controlled. How to regulate the variables M, V and T can be done using monetary, fiscal or policy policies related to increased production.
Monetary Policy
The target of monetary policy is achieved through the regulation of the money supply (M). One component of the amount of money is demand deposits (demand deposits). Demand deposits can occur in two ways first if someone puts cash into the bank in the form of demand deposits and then the second if someone gets a loan from the bank not received cash but in the form of demand deposits.
Another instrument that can be used to prevent inflation is open market politics (selling / buying securities). By selling securities the central bank can suppress the development of the money supply so that the inflation rate can be lower.
Fiscal Wisdom
Fiscal policy concerns the regulation of government spending and taxation which can directly affect total demand and thus affect prices. Inflation can be prevented through a decrease in total demand.
Fiscal policy in the form of reducing government spending and increasing taxes will reduce total demand, so that inflation can be suppressed.