Discuss Whether Inflation Is Bad

Question 1

Level one (understanding)

Answer 1

Inflation is a general rise in prices

Measured by CPI

Can be cost push or demand pull

Question 2

Level two (effects)

Answer 2

Shoe leather costs

Reduced exports

Menu costs

Fiscal drag

Question 3

Level 3 (explanation)

Answer 3

Interest rates don’t rise in line with inflation so there may be a random redistribution of income from savers to borrowers

Reduced international competitiveness may reduce export revenue and increase import expenditure

Fiscal drag may occur as tax bands aren’t adjusted in line so workers have less disposable income with limits economic growth (AD)

Question 4

Level 4 (evaluate)

Answer 4

A stable rate is less of a problem as people can plan ahead

Demand pull isn’t as much of a problem as there is economic growth and less unemployment

Advances in technology reduce menu costs

Firms can reduce their real wage bill but raising wages by less than inflation which may stop firms making workers redundant to cut costs

Not as much a problem if there is lots of spare capacity

Question 5

Conclusion

Answer 5

Costs outweigh the benefits but:

depend on competitors inflation rate as may still be becoming price competitive

A stable rate isn’t as much of a problem as people can plan ahead

Depends on the cause