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inflation - Coggle Diagram
inflation
effects of inflation on firms
difficulty planning because future prices are harder to predict
and prices are rising at unpredictable rates
decreased ability to invest due to the purchasing power of each dollar decreasing
exports become less competitive
because the prices of resources and labor become more expensive
imports become cheaper in comparison to local producers
because of contrast in inflation
existing dept falls in real terms
due to a fix amount of owed money when inflation occurs it becomes cheaper to pay off.
impacts of inflation on governments
governments operating balance may improve
as the increased amount of money taken from tax may outweigh the amount of money spent on government spending
GDP will rise in nominal terms
as inflation causes the general increase in the value of a single dollar of currency
increased interest rates may attract more over seas investors
which will in turn provide the government with additional tax revenues
higher joblessness requires more government spending
because people on fixed wages may then not be able to afford the cost of living as the price of it increases
government dept falls in real terms
effects of inflation of households
saving is discouraged
because individuals are able to more easily get rid of dept by paying off borrowings due to the fact that their fixed amount of money owed is now more easily obtained through the increase in worth of dollars. $600 becomes $1000 through inflation
borrowing is encouraged
inflation allows borrowers to pay lenders back with money worth less than when it was originally borrowed, which benefits borrowers
those on fixed incomes are worse off
because when the worth of a dollar goes down individuals on a fixed wage are essentially getting paid less money
wealth becomes less evenly distributed
because people on lower wages don't experience changes of cash flow due to the fact they are on a fixed wage while business owners are able to bring in more money.
nominal wages
is the amount earned on paper, for example a wage of $12 is a nominal wage of $12