How can inflation affect the economy?
Answer:
Inflation weakens the value of the dollar. This decreases US buying power worldwide, making our economy weaker. When the fed has tried to eliminate inflation in the past it worked but resulted in higher unemployment I believe. It is also inefficient for buyers and sellers.
1. Weakens value of currency.
2. Money inflation in the market.(surplus money) in both money market and capital market.
3. Uncontrollable price hike.
4. Inverse demand and supply theory.
5. Un due increases in purchasing power.
6. Un due parity with richer and poor.
7. Un solicited market operations.
8. Lose in monitary measures by the Government.
9. Failure in fiscal policies.
10. Chances of scams and market technical corrections.
11. Un due Sectral growth in the economy.
12. Stringent monitary policies and fiscal measures taken by the government to control the situations.
The standard textbook arguement is that "expected" inflation has no real impact Only unexpected inflation has an impact. For example, consider a sudden unexpected increase in the rate of inflation say from 3% per year to 10%. This will benefit debtors because they can repay their debts with money that has lost some of its value. The creditors who lent the money to the debtors will be screwed. Once a rate of inflation is expected, then creditors will increase the rate of interest they charge to compensate them for the declining value of the currency. Thus interest rates are tied to the expected rate of inflation.
The answers post by the user, for information only, FunQA.com does not guarantee the right.
More Questions and Answers: