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Banknotes from the 1923 inflation in Germany.

What does inflation mean?

Inflation occurs when there is more total money in a country than there are goods and commodities.

How can inflation occur?

Inflation can have different causes. It may be that the central bank is printing too much money in a country. (The central bank is the supreme bank in a state, which is responsible for printing the banknotes.) The bank does this because the government requires it to, in order to be able to pay its debts in this way apparently more simply. This rarely happens today because most governments and central banks know that inflation is dangerous for a country’s economy.

Inflation stamp from the Weimar Republic 1923. The stamp of the German Reichspost shown has a value over 10 million marks

Inflation stamp from the Weimar Republic 1923 with a value over 10 million marks.

The economy has difficulty

Inflation can start when certain goods are bought more and faster than they can be produced. Then prices rise first and people buy the goods even faster before they become even more expensive. Often, people and companies fear that other goods will now also become more expensive, and they buy them. This can lead to the fact that suddenly all do not keep their money any longer, but spend fast. Perhaps, in addition, people incur debt to be able to buy even more goods. Goods, which are now rare, are getting more and more expensive, and all the money you have to pay for them is losing more and more of its value.

The central banks watch out

Central banks closely monitor how prices are rising and how quickly people are spending money. For inflation to rise, the central bank tries to counteract it through its monetary policy. It then makes it more expensive to borrow money in general. This is to inhibit inflation.

Inflation rate

To what extent inflation takes place is indicated by the so-called inflation rate. An inflation rate of 1 to 5 percent is considered mild inflation; it is not considered dangerous to a country’s economy.

Your questions about this.

Does the state profit from an increased inflation rate? Or the politicians of the country concerned, for example?

Hello Dilola, politicians, like all other citizens, are struggling with inflation and feeling the rising costs of, for example, energy and water. The government may be able to benefit financially from a rise in inflation. This can be the case, for example, when government bonds become more attractive to investors because of higher interest rates and higher purchase amounts have to be paid to the government in return. But since inflation is bad for society as a whole, the state will also try not to let inflation rise too far.

what has this topic to do with politics?

Hello lucia111, the development of a currency has many different influences on politics. When money loses value in an inflation, there are many problems. People can no longer pay back their loans and have to go further and further into debt to avoid ending up in poverty. For many people, this is exactly what happens as a result of inflation, job loss and unemployment. For the debts of the government, on the other hand, inflation is beneficial.The money that he pays back as interest or as redemption is less valuable than when he provided the money to banks and insurance companies. For politics it is important to recognize such social problems in time and to counteract them. Otherwise, social hardship and discontent can quickly become a political problem.

How does inflation affect the repayment of a loan?.?

Hello Melissa, for the borrower this is rather an advantage. It benefits from inflation: the nominal amount of its loan remains the same. The money he has to pay for interest and the repayment of the loan, however, becomes worth less. In this way, the amount of debt it pays decreases. But it can still end up worse off overall, because the loss of value of the money can hit it elsewhere itself.

So you can raise the key interest rate to counteract inflation. Is printed with the frequent granting of credits with low interest rate thus ALWAYS money, whereby an inflation comes? So does the ECB always print money when it lends and does really only the ECB print money?

Hello Hello192, only the ECB can print money and put it into circulation. The most important goal of the ECB is to keep the price level stable, i.e. to prevent strong inflation. Another important goal is to avoid a recession. The ECB does both by constantly monitoring price developments and the economy and intervening when necessary. And this is how it works: The ECB can only influence the interest rates between it and the commercial banks. But they also affect the rest of the economy, because banks – when they have to pay higher interest rates to the ECB – pass them on to their customers. So the loans also become more expensive for their customers. So if inflation rises sharply, the ECB raises the key interest rate. This makes credit more expensive for commercial banks, and usually results in less borrowing. Thus, the money supply decreases and inflation is counteracted. In a bad economic situation (recession), on the other hand, the ECB lowers the key interest rate and thus brings more money into circulation. By the way, this is called open market operations.

Which monetary system was in effect worldwide until 1972 and how did it work??

Hello&, after the Second World War, an international monetary order was established by the U.S. and Western countries. The member countries of this system wanted to stabilize the value of their currencies in relation to the American dollar. The US dollar acted as a so-called "anchor currency". This monetary system, known as the Bretton Woods system after the place where it was founded, existed until the early 1970s. In Europe it has been caused by the "exchange rate snake" replaced the currency pegging system used by the countries of the European Union. On this page of the German Institute for Economic Research you can find a lot of good information about it.

How do the central banks fix the inflation rate? And what inflation rate would be critical or dangerous?? And where can you look it up ? :)

Hi Gianna, on this page of the European Central Bank you can read how the inflation rate is calculated and how the central bank’s assessment of a "dangerous" inflation rate is calculated Inflation rate comes together. There is also a nice video about this on the site. Also our article on the "basket of goods will surely help you to understand the topic better.

Can the Corona pandemic lead to inflation??

Hello Gargamel , one consequence of the Corona pandemic is that countries around the world are taking on more debt and investing more money in the economy and in social tasks. This puts more money into circulation, so inflation could actually occur. On the other hand the economic output is going down. In this situation it is not in the interest of the national economy if the prices rise. So we can expect that central banks will try to keep inflation under control.

how does inflation come about ?

Hello Tetta, we have already explained this in the text above. Please read this at your leisure and maybe talk to your parents about it. If you have any question then feel free to write us again.

how can inflation be fixed?

Hi Justine, central banks try to limit the money supply when inflation is high by raising the prime rate. The banks then have to pay higher interest rates for the money they borrow from the central bank. To cover these additional costs, they also charge their customers higher interest rates. So taking out a loan will be more expensive. This leads to less borrowing and thus again less money comes into circulation. This is a mostly effective remedy against inflation.

when was the inflation?

Hello Molly, there have already been some big inflation. In Germany there was a great inflation in the last century, especially during and after the First World War, which was only ended with a new monetary order in 1923. There was also inflation during and after World War II, which ended with the currency reform.

The decrease of the money circulation. This happens in order to increase the value of money and decrease prices.

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