Question

Biffle explain every question, please
Q1)How can inflation affect the distribution of income?
Q2)What problems does deflation cause?
Q3) Which is a greater problem: anticipated inflation or unanticipated inflation?

Answer 1

Q1) INFLATION AFFECT THE DISTRIBUTION OF INCOME IN FOLLOWING WAYS -

• During inflation different group of people affect differently.Some people experience rise in their income levels and some people not.
• In inflation seller start selling goods at a higher prices making profit from other people( some people are able to pay higher prices some not ).
• Some people start getting benefit as thier income rises more than the prices prevailing in the market.
• Some people loses even their saving because they can't afford higher prices.
• Inflation brings a complete shift in the distribution of income as people with high wealth becomes richer and people with low wealth becomes poorer.

Q2) DEFLATION CAUSE FOLLOWING PROBLEMS -

• Deflation often lead to lower economic growth.
• Deflation discourages consumer to spend less in expectation of fall in price of goods in future.
• Deflation increases real value of debt and increases the real value of money as it become difficult for people to pay off their debt because of less money people have.
• During deflation people stop investment and start saving which cause real interest rates to increase which lead to lower growth of the economy.
• Deflation makes it difficult for relative prices for goods and wages of labour to adjust.

Q3) UNANTICIPATED INFLATION IS GREATER PROBLEM - Unanticipated inflation is unexpected inflation which can occur in future.As unexpected inflation in future money started loosing its value causing more debt in the economy.People with fixed income affected more by future inflation.

ANTICIPATED INFLATION IS NOT THE GREATER PROBLEM - Anticipated inflation is known inflation which does not cause harm to people as they can plan accordingly.People start saving more as they known in future prices are going to be high.Businessman can plan accordingly to invest as they known in future prices are going to be high.