Question

My name is Donna. I am a college student studying to be an English teacher. I dislike inflation, my degree is costing me more than i had anticipated. Good thing that I am a senior, tuition when I started three years ago was 20% less. Maybe I should get my masters but that would put me unto more debt. Why do we have so much inflation? I work part time as a server and have a low fixed rate loan that I must repay once I graduate.

How is my individual affected by inflation and deflation?

How is my individual affected bu unexpected inflation?

Answer 1

The following are the effects of inflation in the economy which ultimately are the reasons Donna is affected by it:

i. Producers are positively affected in times of inflation as they get more price and more profit from the sale of their product. Workers will lose as they will find a fall in their real wages which implies lesser goods and services with the same nominal wage.

ii. Fixed income earners suffer greatly as inflation reduces the value of their earnings.

iii. During inflation, creditors lose because they receive in effect less in goods and services than if they had received the repayments during the period of low prices. Debtors, on the other hand, gain since they repay their amount in currency which has lost its value.

iv. Inflation tends to increase the aggregate money income of the community as a whole on account of larger spending and greater production. The volume of employment also increases under increased production.

However, the real income of people fail to increase proportionately because of the fall in purchasing power.

It is because of this declining purchasing power our individual is not happy with inflation and is negatively impacted by it.

Now, this is how deflation impacts individuals in the economy:

In the short run, deflation affects the comsumers positively. This is because deflation increases the purchasing power of money, allowing people to save more as their income increases relative to their expenses.

Deflation also decreases debt burden as deflation helps them to deleverage.

However, in the long run, deflation is not desirable. This is because it slows down production as producers are getting lesser price for their products, and negatively impacts the economic activity in the economy. This affects the employment level and ultimately the income levels of individuals in the long run.

Hence, if there were deflation in the economy, Donna would have not been this troubled by her debt. However, deflation might have cost her, her job which might have made things even difficult for her.

The individual is adversely affected by unexpected inflation. This is because Donna planned repaying her loan with a specific value in mind. However, when the value of loan increased, her means of income became insufficient to repay the loan with those sources. This made things difficult for her. Unexpected inflation also reduced the value of Donna's fixed income due to which she suffered adversely.

Had she known about inflation before, it would have been easier for her to plan her loans and work accordingly.