Inflation

Question 1

Benefits/cons of high inflation (3,3)

Answer 1

+Prevents risk of deflationary spiral
-Can lead to price wage spirals

+Reduces value of debt, improving inequality
-Reduces real incomes/savings, worsens inequality

+Lower real wages lower costs for firms
-Unstable inflation=risky, decreases investment

Question 2

Deflationary spiral

Answer 2

Consumers see prices falling and delay purchases, reducing AD further, and cycle continues

Question 3

Price wage spiral

Answer 3

Workers see inflation, so negotiate higher wages, increasing costs (SRAS), increasing prices further, SO CYCLE CONTINUES. Could end up with hyperinflation