The Significance of Inflation

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    The Significance of Inflation

    • The impact of inflation on an economy will depend on
      • The rate of inflation
      • The cause of the inflation
      • Whether it is fluctuating
      • Whether it was correctly anticipated
      • Its rate relative to that of other countries.
    • A low rate of inflation is unlikely to cause significant problems for an economy
      • A low rate of demand-pull inflation may bring benefits for an economy, as firms will be encouraged to increase output
      • Cost-push inflation, however, can be more harmful, as it is likely to be accompanied by a fall in real GDP and a rise in unemployment
    • A high rate of inflation is likely to cause a number of problems for an economy
      • With the higher rate of inflation comes higher menu, shoeleather and administrative costs, along with greater inflationary noise.
      • Firms will therefore have to spend a large amount of time managing their money
        • This involves an opportunity cost, as this time could be used on planning new products.
      • With rapid price rises, it becomes difficult to judge what are the best buys, and people may be less prepared to accept money in payment and will resort to bartering.
    • Fluctuating inflation creates inflationary noise, and makes it difficult for the government, firms and households to plan ahead.
    • A big factor on whether the rate of inflation is damaging to an economy is the rate of inflation relative to other economies
      • If a country has a rate of inflation lower than the countries it trades with, then its products will become more internationally competitive, and its current account position is likely to improve.
    • Inflation can affect people differently, depending on their spending patterns.

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