Question

What are the effects of inflation?

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Three effects of inflation\text{\underline{effects of inflation}} are:

  1. Decreasing value of the dollar\textbf{Decreasing value of the dollar} - as the prices rise, every single dollar has less and less purchasing power because more dollars are necessary to buy same goods or services.

  2. Increasing interest rates\textbf{Increasing interest rates} - as the prices increase, the dollar is losing its purchasing power, so interest rates have to rise to ensure greater returns on the deposit which will then compensate for lost value of the dollar, because more dollars from interest could possibly buy the same goods or services than less dollars could have bought before.

  3. Decreasing real returns on savings\textbf{Decreasing real returns on savings} - similar to previous example, the returns on savings will nominally state the same, but as those returns in dollars could buy less than before because of the lost purchasing power, returns in real terms (corrected for inflation or some other factor such as purchasing power parity) decrease.

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