Inflation/ Deflation

Question 1

Why is inflation bad?

Answer 1

fiscal drag- households worse off but higher tax revenues
fixed incomes, low bargaining power, wages/ incomes fail to keep up with rising cost of living- falling real disposable incomes- falling standard of living
reduced international competitiveness- worsening trade balance CA and export performance
Damage to supply side- reduced business confidence, increased cost of borrowing, less investment, less improvement in PPF, may discourage FDI
reduced profits- reduced dividend- reduced incomes for share holders

Question 2

Evaluation of inflation

Answer 2

cause?
wage price spiral
how high?
for how long?

Question 3

Winners of inflation

Answer 3

Some asset owners- often well off households- people encouraged to spend now- inequality could increase
Government- real value of public debt falls

Question 4

Demand side deflation

Answer 4

BAD if anticipated
Lower AD, lower/ negative growth
Reduced investment, weaker supply side
higher unemployment, lower incomes
lower standard of living
deflationary spiral! put off purchases, expect D to be lower so reduce I
real interest rates rise- incentive to save, higher cost of borrowing

Question 5

Supply side deflation

Answer 5

fall in costs of production
lower prices for consumers higher con surplus, higher standards of living
economic growth, higher output
more profits- higher investment - supply side LR growth
improved international competitiveness