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Consequences of Inflation - Coggle Diagram
Consequences of Inflation
Consumers
Prices rise
Higher proportion of income spent on necessary consumption
Less money saved by consumers for future benefit
Fall in real incomes
Real value of savings falls
Shoe leather costs
Expectations of further inflation
Short-term spending boom
Further inflation
Negative feedback loop
Cost of debt falls
Net income of debtors rises
HOWEVER,
some interest rates can be index-linked
Firms
Business uncertainty
Decrease in investment
Asset depreciation
Long-term productive capacity falls
Increased interest rates
Decrease in investment
Cost of debt falls
HOWEVER
, some interest rates may be indexed
Menu costs
Exports become less competitive
Fall in foreign demand for goods
Foreign factors of production become cheaper
Some firms may relocate
Real value of some costs (e.g. wages) may fall
HOWEVER
, prices rises and strong unions may combat this
Government
Exports fall and imports rise
Shift in balance of payments
Fall in aggregate demand
Increased government spending and decreased government revenue
Possible increase in unemployment
Unemployment can increase (see workers)
Increased interest rates
Higher cost of future borrowing
Real cost of debt falls
Fall in real cost of national debt
Workers
Foreign factors of production become relatively cheaper
Some firms may relocate
Increased unemployment
Real value of wages falls
HOWEVER
, strong unions may negotiate higher wages
Short term boom
Low unemployment in the short term before long-term increase
HOWEVER
, an increase in cost-push inflation can cause stagflation (high inflation and high unemployment)