consequences (essay plans)

Question 1

impacts of demand-pull/cost-push inflation

Answer 1

• erode real value of wages -> nominal wages may not rise as quickly as inflation -> declining real incomes -> reduced purchasing power -> low-income households with a higher MPC are disproportionately affect as essential goods become more expensive -> falling real wages = falling consumer confidence -> reduced household spending -> lower growth
• worsened BOP -> higher export prices -> less internationally competitiveness -> foreign demand falls -> worsened current account -> higher export prices also increases demand for imported goods -> worsened trade balance
• reduced business confidence + investment -> higher production costs -> lower profit margins -> reduced earnings for investment -> more uncertainty -> less investment in capital costs -> less productivity -> less potential eco. growth
• reduces real value of savings -> erodes purchasing power of money -> people that rely on savings lose out e.g. pensioners

Question 2

evaluate impacts of demand-pull/cost-push inflation

Answer 2

• wages may adjust to inflation over time
• if inflation leads to currency depreciation -> exports become cheaper in foreign markets -> restored price competitiveness
• borrowers benefit as real value of debt declines -> gov. with high public debt can use inflation to reduce debt-to-GDP ratio -> improved fiscal sustainability