Question

1. From a truly free market/capitalist perspective, how is inflation a beneficial process

(our myriad discussions on this concept and the supplemental readings will be very

       helpful here)?

Answer 1

A free market is a system in which the prices for goods and services are self-regulated by the open market and by consumers. In a free market, the laws and forces of supply and demand are free from any intervention by a government or other authority. It is the interection of the supply and demand in the market which decide the price of commodity. The capitalist system is also a system in which there is no government intervention in the economy and the rational and free entrepreneurs invest their money to produce goods and services and earn profit by selling them.

Inflation is the sustained increase in the general price level of all the goods and services in an economy over a period of time.

The sustained increase in the price of goods and services is a beneficial process because if there is increase in the price of goods and services, there is more profit to the entrepreneurs/capitalists and this increase in profit will encourage them to invest more money and hence the economy develops.

There is a cyclical and positive effect of an increase in price, as increase in price of goods and services will lead to an increase in total revenue for manufacturers, which will increase their profit and hence they will invest more money in the market. Increase in investment will increase the incomes of the resources owners( may be labours, capitals or any other resource) this increase in incomes will increase the level of aggregate demand in the economy. The increased ase in the level of aggregate demand is one of the main factors of growth of an economy. The increase in aggregate demand will increase the price of goods and services further and hence the same process repeats.

But during all this process since there is increase in real GDP (production of goods and services) so it is very good for economy. It is also shown by the Phillips curve that there is a negative relationship between Inflation and unemployment. Hence the overall process is very beneficial for the economy.