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Consequences of inflation, Factors affecting the costs/benefits of…
Consequences of inflation
Costs
A reduction in net export
Inflation may reduce the international competitiveness of a country's products and so increase import expenditure and lower export revenue. This may result in balance of payments problems.
Menu costs
costs to firms of having ot change prices due to inflation
An unplanned redistribution of income
Some people may gain and some people may lose as a result of inflation
e.g. borrowers will gain as they pay less over time
lenders will lose as the money loses value over time
Shoe leather costs
Costs of moving money around in search of highest interest rate.
Fiscal drag
The income of poeople and firms being pushed into high tax brackets as a result of inflation.
Discouragement of investment
Inflation may dissuade firms from investing, which will have an adverse effect on economic growth.
inflationary noise
Confusion over relative prices caused by inflation.
e.g people getting angry about higher price when their income is also rising ( no real change )
Benefits
Stimulates output
A low and sstable inflation rate caused by increasing demand may make firms feel optimistic about the future.
Reduces burden of debt
Debt burdens may fall. For exmaple, those who have borrowed money to buy a house may experience a fall in their mortgage payments in real terms
Prevents some uemployment
Firms can keep staff as they can increases their prices without pawying high wages.
Factors affecting the costs/benefits of inflation (Evaluation)
The costs/benefits will depend on:
The cause of inflation (demand-pull or cost-push?) Demand-pull inflation is better than cost-push as there is firms will experience greater sales.
The rate of inflation (e.g. 2% or 50%?) This will affect the impact grealtly
The inflation rates of other countries (how do they compare?)
Whether the inflation rate was expected or not.