Lesson 9 - Costs of Inflation

Question 1

Why is inflation beneficial for borrowers?

Answer 1

Eroding effect
Wages increase
Mortgage/loan has a fixed value

Question 2

Why may inflation be beneficial for the government?

Answer 2

Erodes debt
Tax revenue rises due to rising wages

Question 3

What impact does inflation have on wages?

Answer 3

Rising prices allow firms to increase wages
Employers have flexibility to increase wages at a slightly lower rate than the rate of inflation

Question 4

What are the positive impacts of inflation?

Answer 4

Spending power, consumers purchase expensive items
Mortgages easier to pay off, borrowed money not impacted by inflation
Rising wages
Government debt easier to pay back

Question 5

Whatv are the negative impacts of inflation?

Answer 5

Lower consumption
Living standards may fall
Those on fixed incomes will struggle
Expectations
People will save as opposed to spending, lowers GDP

Question 6

Why is high inflation a problem?

Answer 6

Falling real incomes - Wages lag behind prices
Risks of wage inflation - High labour costs, low profits
Cost of Borrowing - Higher interest rates
Reduced business competitiveness
Business uncertainty - Unable to plan expenses

Question 7

Who are the winners from inflation?

Answer 7

Workers with strong bargaining power
Borrowers - If real interest rates are negative
Producers - If prices rise faster than costs

Question 8

Who are the losers from inflation?

Answer 8

Retired/Fixed incomes
Lenders - If real interest rates are negative
Savers - If real returns are negative
Workers in low paid jobs