Question

what is the good and bad of inflation in the economy of a country

Answer 1

Solution.>

The good of inflations are:

1> Moderate inflation enables adjustment of wages: A modest rate of inflation is claimed to make adjustment of relative wages easier. Cutting nominal wages, for example (workers hate and fight a nominal pay cut) can be hard.

However, if average salaries increase due to mild inflation, it's easier to boost productive workers' wages; unproductive employees will get their wages frozen – which is basically a real pay reduction.

2> Inflation enables adjustment of relative prices: Similar to the last point, moderate inflation makes it easier to adjust relative prices.

3> Inflation can boost growth: The economy may be trapped in a recession during periods of very low inflation. Admittedly setting a low inflation rate will help improve economic growth.

The bad of inflation are:

1> Fall in real wages: High inflation can, in some circumstances, lead to a fall in real wages. If inflation exceeds nominal wages, then real revenues fall.

2> Menu costs: The cost of changing prices lists becomes more frequent during high inflation. Not so significant with modern technology.

3> Inflation tends to discourage investment and long-term economic growth: This is due to the ambiguity and misunderstanding that exists most likely during times of high inflation. Low inflation is said to encourage greater stability, and encourage risk-taking and investment by firms.

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