Effects on inflation

Question 1

Production, Investment, Employment and Growth (Mild inflation)

Answer 1

• cause: small rise in AD
• usual for wage costs to lag behind increase in prices of gds & svs
• rise in GPL and profits
• incentive for firms to increase production, then investment (stimulate economic growth)
• rise in national output (assuming economy not at/near full employment)
• higher employment, more jobs

Question 2

Production, Investment, Employment and Growth (hyperinflation)

Answer 2

• COP rises (economy at/near full economy)
• drop in profits
• rise in uncertainty and loss in confidence
• firms reduce production, investment drops
• drop in real national output
• loss of jobs, unemployment rises

Question 3

Factors that determine extent of impact

Answer 3

• rate at which gpl is rising/type of inflation

- cause of inflation

Question 4

Savings

Answer 4

• inflation causes value of money to drop
• real value of savings drop (purchasing power)
• nominal interest rate offered by banks does not rise with inflation
• discourages savings in banks
• less loanable funds for capital formation
• drop in production and investments
• slows down economic growth