Refute the following statement: "Perfectly anticipated inflation does not have any negative consequences for the economy."...

Refute the following statement: "Perfectly anticipated inflation does not have any negative consequences for the economy." Explain your answer.

Expert Solution

A perfectly anticipated inflation will have negative consequences for the economy. Internally in the economy after anticipating the inflation perfectly the factors of production will adjust their return accordingly but this will reduce the value of money in the economy.

The inflation has only increased in the local market and not in the international market or other countries where the country competes with the other countries for exports. After increased inflation, the price of the countries exports will rise too. Due to high prices, the exports will decline and the country will face negative consequences like reduced aggregate demand in the economy due to falling exports.

Second negative consequences are related to imports, inflation will not affect the price of imports in the economy. It will increase the imports in the economy because then the price of the imported good will be cheaper compared to local goods.

Rahul Sunny answered 2 years ago

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