Effects Of Inflation

Question 1

What are the benefits of high inflation

Answer 1

Protects from deflation which can lead to deflationary spiral
Reduced debt and inequality
Decreases real wages, which lowers costs for firms and gov

Question 2

What happened to americas GDP in 1929

Answer 2

Lost 25% of their GDP because of the deflationary spiral

Question 3

What are the disadvantage’s of inflation? What does it cause

Answer 3

Causes a Price wage spiral
Reduce real wages and savings, increasing inequality
Can lead to investment uncertainty as you don’t know future prices costs or profits

Question 4

What could be a consequence of a price wage spiral?

Answer 4

Hyperinflation

Question 5

What is price wage spiral

Answer 5

If there is a high inflation rate, prices will increase a lot which will lead to the cost of living increasing, if there is a high inflation rate, workers will negotiate higher wages to help them cover their higher cost of living. Higher wages increases firms costs shifting SRAS inwards, increasing PL, this means prices have increased again which means cost of living increases as well so workers will negotiate even higher wages, which will shift SRAS inwards again, leading to a price wage spiral.