Effects of Inflation

Question 1

Household - Savings

Answer 1

LOSE
Erodes the value of savings as purchasing power has decreased
Disincentive to save as people want to spend before prices increase even more

Question 2

Household - Borrowers

Answer 2

WIN
Incentive to borrow as they wont have to pay back as much
People can borrow more money to purchase an asset if inflation causes the price of the asset to rise

Question 3

Household - Fiscal Drag

Answer 3

LOSE

People’s incomes increase so they are moved into a higher marginal income tax bracket

Question 4

Household - Planning/Budgeting

Answer 4

LOSE

More difficult to plan ahead because prices are unpredictable

Question 5

Household - Fixed income earners

Answer 5

LOSE

Their income stays the same but does not have the same purchasing power as before inflation has occurred

Question 6

Household - Incomes that rise faster than inflation

Answer 6

WIN

People who get paid based on the value of products they sell are likely to have increased income

Question 7

Firms - Factor costs

Answer 7

LOSE

Inflation increases production costs so profits decrease

Question 8

Firms - Investment

Answer 8

LOSE
Prices of machinery, equipment etc increases so firms can’t invest as much
Investment is seen as a higher risk due to inflation causing business confidence to fall

Question 9

Firms - Planning

Answer 9

LOSE

Planning is more difficult because future costs are unpredictable

Question 10

Firms - Financing/Borrowing

Answer 10

WIN

Encourages debts because they become cheaper to pay off

Question 11

Firms - Speculation

Answer 11

Business are more likely to consider buying non-productive assets that will be most affected by inflation eg land

Question 12

Firms - Inflated results

Answer 12

LOSE

Business’ profit and revenue may rise but their purchasing power could still be lower than before inflation

Question 13

Firms - Exporters

Answer 13

LOSE

Goods are more expensive for other countries to export out of NZ so sales are likely to decrease

Question 14

Firms - Importers

Answer 14

WIN

Goods will be less expensive for NZ to buy from other countries so costs of production are likely to decrease

Question 15

Government - Government spending

Answer 15

Rising costs so government has to spend more on education etc
People are likely to demand higher benefits to match the purchasing power they had before inflation

Question 16

Government - Income

Answer 16

Increased consumer spending increases GST payments

Government gets more income tax revenue from consumers

Question 17

Government - Operating balance

Answer 17

Increased govt spending has a negative effect on the operating balance
Increased tax through GST has a positive effect on the operating balance
Overall effect depends on which is greater^