Question

“Inflation is not all that bad”

Examine 3 arguments, with examples, for this statement.

Provide a title indicating whether they argued for or against the statement.

Answer 1

1. Inflation greases the wheels of Labor Market: Economists believe that inflation of 2 to 3 % is good for the economy. With low inflation rate, the real wages (nominal wages / price) might go up due to increase in nominal wages and at some time the real wages may have gone down due to unchanged nominal wages. For example, a 2 % wage cut in zero inflation, in real terms is like 3% rise with 5 % inflation. However, workers do not see that way. A 2 % wage cut may seem as insult whereas a 3% raise is still a raise.

2. Revenue from Inflation Tax: When the inflation is zero, the government gets no revenue But as inflation increases, the revenue to government also increases in the form of the inflation tax. So, some level of inflation is not bad as it gives revenue to the government.

3. Inflation favors the borrowers: All the borrowers would love to have some inflation in the economy as inflation would erode the value of their debts. For example, in 1980 my parents purchased a house for $10,000. But over the time their wages also increased with the rise in inflation. So, the debt repayment was taking smaller income share.