Inflation - Winners vs Losers + Control

Question 1

Who will win from high inflation rates (3)

Answer 1

workers in strong trade unions because they can raise wage to protect their real wage incomes
Debtors if the real interest on loans are negative thus the real value of debt drops
Producers if their prices rise faster then costs it causes higher profit margins

Question 2

Who will lose from high inflation (5)

Answer 2

fixed income people like pensioners
lenders if real interest is negative
savers if real interest rate is negative
workers in low-paid jobs with little bargaining power
exporting firms because they are less price competitive

Question 3

What are the two graphs we need to learn on controlling inflation

Answer 3

demand side
and
supply side

Question 4

how does demand side control work

Answer 4

interest and tax rates increase to reduce price levels (y axis) and this causes shift in demand inwards decreasing income level (x axis) as well

Question 5

how does supply side control work

Answer 5

trade unions may be banned from rioting which prevents increase in wage and will shift supply to the right which decreases price level (y axis) and increase real income (x axis)

Question 6

What is the danger of demand side control

Answer 6

it reduces real incomes so could lower economic growth