Question

Review the chapter on inflation and answer the following questions.

Why do some economists claim that we should not worry too much about inflation?

Other economists think that there are significant costs associated with inflation above 2-3%. What are they? Briefly discuss

can these be answered succinctly ?

Answer 1

1) A low rate of inflation is beneficial for the economy . As the price level rises slowly , it encourages investment in the economy . It does not erode the real value of savings to a higher extent . It reduces unexpected economic turbulances as may be caused by very higher rates of inflation . It also helps to reduce unemployment . Hence economists claim that we should not worry too much about inflation when it is very low . Rather there are other areas like unemployment , BOP etc which should be worried about .

2) Costs of high inflation : eroding away the real value of assets , fall in real incomes , menu costs , uncertain economic conditions leading to lower investments , there are also costs associated with reducing the inflation to normal level .