What are the positive and negative effects of inflation on the economy?
Explanation
Positive effects of inflation are:
(i) Reduction in the Quantity burden of debt. Debtors gain during inflation .
(ii) Higher prospects of profit lead to increase in resources and increased factors of production.
(iii) Higher tax yields if taxes are advalorem taxes.
(iv) Higher prices encourage higher output and possibly results in higher profits.
Negative effects of inflation are:
(i) Inflation discourages savings.
(ii) Encourages increases in interest rates.
(iii) Inflation redistributes income haphazardly. There is a fall in real income especially of those on fixed incomes e.g. pensioner.
(iv) Creditors lose during inflation.
(v) Balance of payments' problem since foreigners will want to sell to such countries and do minimal buying from such high cost producers.
(vi) Higher prices discourage exports since such countries will be high - cost producers