Theory question 105
Money and InflationSection B: answer four questions only from this section.
What are the positive and negative effects of inflation on the economy?
Show the model answer
Model answer
Positive: mild inflation raises profits and encourages investment and production
Increases employment in the short run
Debtors gain (they repay with money of lower value)
Increases government revenue from taxes
Negative: fixed-income earners and pensioners lose purchasing power
Creditors and savers lose; saving is discouraged
Exports become dearer, worsening the balance of payments
Uncertainty discourages long-term planning and investment
Encourages hoarding and speculation
Leads to industrial unrest as workers demand higher wages
Widens the gap between rich and poor
Explanation
Give both sides, each point explained.