Question: effects of inflation on a country's political and economic system? inflation effects interest rates, exchange rates, the cost of living and general confidence in a country's political and economic system

Answer: Well, your additional comments kind answer your question. The thing with inflation is the next. Prices start going up, mainly caused by excess in demand, lets try to see it with a simple example. If prices of raw material go up, final distributors have to rise prices to obtain the same level of profit. Everyone can raise prices if they want, but what happens with the consumers. They can´t ask for a rise, they have annual contracts. So prices go up, income stays the same. Businesses have to close or turn down production. With less production, less people are employed. Less people employed, less income to spend and the thing becomes very critical. So economical system enters a recession or, if not treated correctly, a depression. Depression with inflation means high prices and little income to buy them... if you still got your job. Politically, central banks have 1 prioritary goal, which is to mantain the purchasing power of their currency. So when inflation is hiking up, central banks try to do anything to stop it. How? Raising intrest rates to stop investment and consumption, which will lower demand for goodsA more extreme measure, but rarely followed because of the political cost, would be a tighter fiscal policy,which in short states to rise taxation. The Us is right now trying to avoid, or cool down inflation, by hiking up intrest rates. So, for some 2 years, the political agenda has been a rise in intrest rates, when 10 years ago it was the other way around!\n\nHope that helps. Good luck!
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