Question

a) Why do some economists claim that we should not worry too much about inflation? 2 marks

b) Other economists think that there are significant costs associated with inflation above 2-3%. What are they? Briefly discuss

Answer 1

Answer:--

a. Some economists claim that we should not worry too much about inflation because a moderate rate of inflation brings growth in the economy as it adjusts the wages and relative prices in the economy.

b. But there are significant costs associated with inflation above 2-3% because it creates uncertainty in the economy and hampers the growth of economy. High inflation leads to increase in a price and decrease in purchasing power of money which decreases aggregate demand leading to reduction in supply of the goods. It increases cost of living due to which savings decrease in the economy. It increases interest rate which reduces investment motives. Inflation reduces income of people due to which economic activities reduces. Inflation increases unemployment rate as many workers lose their jobs due to reduction in production. Inflation reduces the value of currency in the foreign markets which decreases foreign competitiveness.

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