Theory question 104
Money and InflationSection B: answer three questions only from this section.
Describe the effects of inflation on the economy of a country.
Show the model answer
Inflation is a persistent rise in the general price level
Fixed income earners (workers, pensioners) lose purchasing power
Debtors gain and creditors lose, because money repaid is worth less
Savings are discouraged as money loses value
Producers and traders may gain from higher prices and profits, encouraging investment in the short run
Exports become less competitive and imports cheaper, worsening the balance of payments
Uncertainty makes business and government planning difficult
Leads to workers' demands for higher wages and industrial unrest
Redistributes income arbitrarily, widening inequality
Money may lose its store-of-value function; speculation and hoarding increase
Show who gains and who loses, and the effects on saving, trade and planning.