Question

Inflation often gets a bad rap... Is inflation always a negative thing for an economy? Does inflation have any pros? Give examples and explain.  

Answer 1

Inflation refers to the general rise in the price level of all goods and services within the economy.

Even though it is often considered as a negative aspect of an economy, it is not always a negative thing for an economy.

Yes it does have some positive aspects too. Inflation may increase the current demand for any good or service. For example when an economy is facing inflation, people will expect the prices to be high in future too. They hence prefer purchasing goods and services at the present, thereby increasing the current demand.

Inflation also helps in combating the negative effects of a deflation which is much worse for an economy when compared to the negative aspects of an Inflation.

When inflation is maintained at a moderate rate, it is usually beneficial for the investor's. This is because, higher prices Increases their expectations of receiving higher returns. This will in turn lead to an increase in the employment rate and stimulate greater labour demand.

For example when the inflation rate is between 3 to 5%, economy will benefit from inflation as the rate of inflation will be much moderate. But beyond this rate, the inflation becomes very serious and creates havoc within the economy.