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In: Economics

When inflation occurs some economic agents gain and some lose. Who would gain and lose if...

When inflation occurs some economic agents gain and some lose. Who would gain and lose if deflation occurs? Why? What will happen to interest rates and investment according to Keynesian and Classical/ Monetarist theories?

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Answer :

inflation - is a situation when value of money decreases means prices are increasing due to which purchasing power of money decreases.

During inflation following economic agents gain :

  • Debtors
  • Wage earners (only those wage earners gain whose wages adjust according to price rise.)
  • Share holders or stocks holder
  • Businessmen
  • Farmers gain due to increasing prices
  • Government as a debtor gain etc.

During inflation following economic agents lose:

  • Creditors
  • Salaried persons (as their salaries are slow to adjust with price rise)
  • Fixed income group
  • People who invest in debentures, securities, bonds etc.(due to fixed interest rate)
  • Government as a creditor

Deflation : is a situation opposite inflation.

During deflation value of money increases or prices decrease due to which purchasing power of money increases.

Following economic agents gain from deflation :

  • Creditors
  • Fixed income group
  • Salaried persons
  • People who invest in debentures, securities, bonds etc.
  • Low income groups gain as their purchasing power increases

Following lose :

  • Debtors
  • Producers
  • Businessmen
  • Traders and equity holders
  • Government (as their revenue decline)

according to keynesian and classical theories :- The interest rates decrease during deflation due to which people motivated to invest more. So interest rate decreases during deflation due to low cash flow in the economy while investments increase because of low interest rates.

*hope the answer is clear to you. if you have any confusion feel free to ask.

please give feedback . thank you

Rahul Sunny answered 2 years ago
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