Please enable JavaScript.
Coggle requires JavaScript to display documents.
Consequences of inflation, Factors affecting the costs/benefits of…
Consequences of inflation
Benefits
Reduce in burden of debt
Prevents some unemployment
Stimulates Output
Costs
Shoe leather costs
Cost involved in moving money from one financial institution to another in hope of finding the highest rate of interest
Fiscal drag
Happens when the income levels corresponding to different tax rates are not adjusted in line with inflation
Menu Costs
Cost involved in changing prices
Affects firms
Discouragement of investment
Unanticipated inflation can cause uncertainty and make it more difficult for firms to plan ahead
An unplanned redistribution of income
Some will gain while some will lose
For example, If the rate of interest does not rise in line with the inflation, the borrowers will gain while the lenders lose.
This is because borrowers will pay back less in real term and lenders recieve less
Savers are also losing out as the real value of their savings fall
Inflationary noise
Happens when inflation causes consumers and firms to confuse price signals.
Inflation can make it difficult to assess what is happening with relative prices
A reduction in net exports
Reduces a country's international competitiveness
Increase in import expenditure but decrease in export revenue
Causing a problem in the balance of payment
Inflation causing inflation
Factors affecting the costs/benefits of inflation(EVALUATION)
The cause of inflation (demand-pull or cost-push)
Demand pull is better than cost-push as there is firms will experience greater sales
The rate of inflation (e.g. 2% or 50%)