Postive effects of inflation
Answers
Answer:
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Explanation:
Inflation favourably impacts the economy in the following ways: Higher Profits since producers can sell at higher prices. Better Investment Returns since investors and entrepreneurs receive incentives for investing in productive activities. Increase in Production.
Advantages of Inflation
Deflation is potentially very damaging to the economy and can lead to lower consumer spending and lower growth. For example, when prices are falling, consumers are encouraged to delay purchasing in the hope prices will be cheaper in the future.
A moderate inflation rate reduces the real value of debt. If there is deflation, the real value of debt increases leading to a squeeze on disposable incomes.
Moderate rates of inflation allow prices to adjust and goods to attain their real price.
Moderate rates of wage inflation, allow relative wages to adjust. Nominal wages are sticky downwards. With moderate inflation, firms can freeze pay rises for less productive workers – to effectively give them a real pay cut.
Moderate rates of inflation are a sign of a healthy economy. With economic growth, we usually get a degree of inflation