costs and benefits of inflation

Question 1

costs of inflation

Answer 1

-lower purchasing power
-erosion of savings (shoe leather costs- effort involved)
-lower export competitiveness (SPICED)
-wage/consumer spirals: demanding higher wages to meet inflation, increase COP passed onto higher prices. menu costs: keep updating
-fiscal drag: inflation is rising and workers receive higher income. in line with cost of living but are dragged into higher tax bands
-inflationary noise: inflation rate volatile: price signalling loses value

Question 2

benefits of inflation

Answer 2

(low and stable)
-workers with higher wages:
-consumption is natural: won’t bring forward/delay
-firms encouraged to increase output
-can keep unemployment low in recession: firms don’t want to get rid of skilled workers, firms raise prices but don’t increase wage as much
-reduces real value of debt: easier to service
-improvement of gov finances- taxes

Question 3

evaluation of inflation

Answer 3

-rate
-cause (demand pull better)
-duration
-expected/unexpected
-stability