Money and Inflation The nation's economic stability has many factors which amount to inflation. Inflation may be caused by a number of problems, but there are some specific examples which have direct control over which way the prices and spending sway.
Inflation simply means that the American dollar, in this case, is less valuable on the foreign exchange market and the gold standard is moved to higher prices; which simply means that more currency is needed to exchange for gold. Any slight change in investments or a company's cost premium could change the entire economy because of the domino effect acting on the rest of society. For an example, flooding in a particular region of the country could cause inflation. In the long run, the flooding may be catastrophic for businesses because it could cause a shortage of products.
In order for the businesses to make up for any lost income, they must boost their prices and make the profit margins go up. The profit margins make up for the lost income and balance out that particular company, but everyone else must suffer the consequences. In the business world; the more they produce, the less they can sell for; the less they produce, the more they sell the product for. Profit margins can have a direct impact on the consumer.
The more an item cost, the less a consumer will want to purchase that particular good. Higher profit margins may be able to balance a company's budget, but unless their product is in very high demand, most people will want to buy the product. The lack of people purchasing the item may cause the company to lose money and have no alternative other than to lay off workers. People out of work means that less consuming will take place, meaning that other businesses will hurt due to the lack of sales, perhaps causing those other businesses to move up their own profit margin, in turn creating the same cycle at a faster rate. With businesses under, the unemployment rate would be phenomenal. People would be seeking government assistance while the government itself is so far in debt and tied up in credit.
The government assistance would add to the already huge problem of the federal government spending more than it has. The result of all the hand outs would cause an enormous dent on the federal deficit. The deficit is already bad enough, but in a case like this, the government would try to do something to prevent a long recession. The Federal Reserve bank tries to balance the economy out by influencing other banks to print up more money to make up for the losses. This may stop the ship from sinking all the way, but this decreases the value of the dollar because of the excessive amount of money in circulation. The dollar is less valuable on our own market, so prices rise.
The dollar is also less valuable on the foreign market which means that it takes more money to equal a yen, mark, or pound. Also, the value of an ounce of gold is worth less due to the gold standard, which lets gold be redeemed for dollars. Inflation has occurred and value of the dollar has decreased. If most people wouldn't panic and just stay calm, less stress would be spread, making the entire economic industry a safer and easier thing to live with.