Monday, October 22, 2007

Advantages of inflation

There are many Disadvantages of inflation.

Are there any advantages of inflation?

Firstly it is interesting to note the government's target for inflation is CPI = 2% +/- 1. They have a target of 2% rather than 0%

If inflation is 0% or lower (deflation there can be several disadvantages)

  • Deflation can cause lower spending. The value of money is increasing so people wait before buying goods.
  • A small amount of inflation makes it easier for the relative price of goods to update.
  • Deflation can cause real wages to rise above the equilibrium level. Workers resent a cut in nominal wages. Therefore a moderate amount of inflation enables an increase in nominal wages, without causing excessive real wage rises.
to summarise there are some advantages of having a low rate of inflation e.g. 2%. However, as inflation rises above 2% we start to see the disadvantages outweighing the advantages
Problems recovering from recession

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