Theory question 109
Money and Inflation(a) Highlight the difference between creeping inflation and hyper inflation.
(b) List any four negative effects of inflation.
(c) Outline four ways in which the government of your country can control inflation.
Show the model answer
(a) Creeping inflation is a slow, mild rise in the general price level (a low single-digit rate a year); hyperinflation is a very rapid, uncontrollable rise in prices (e.g. hundreds of per cent) that destroys the value of money.
(b) Any four: reduces real incomes of fixed-income earners; discourages saving; hurts creditors and benefits debtors; makes exports less competitive, worsening the balance of payments; causes uncertainty and discourages investment; encourages hoarding and speculation; redistributes income unfairly; can lead to industrial unrest.
(c) Any four: raise taxes; cut government spending; raise interest/bank rate; open market sale of securities; raise reserve requirements; increase production/supply of goods; price control; wage restraint (incomes policy); import goods in short supply.
Control measures reduce demand or increase supply.