Posted: Jun 13, 2022 12:38 PM
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Inflation has soared to a 40-year high, reaching 8.6 percent last month. While economists and government officials have given numerous reasons for this, there is an easy-to-understand explanation. Once the reasons are understood, we can see why it occurred, who is to blame and how to fix it.
Inflation simply means that prices are rising. There is only one reason for that: total demand in the economy is greater than total supply. Why is that occurring today?
Let’s first make some basic assumptions. Both business and consumers are motivated primarily by self-interest. Business’ self-interest is to maximize profit. As such, they would generally like to charge as high of a price as possible.
Consumers are similarly motivated to purchase products at the lowest price possible. Given most consumers have a fixed amount they can spend on goods and services, they generally try to purchase products at the lowest possible price. The lower the price, the more goods and services they can purchase.
Eventually business’ willingness