Question

A)Why is hyperinflation bad?
B)Why is deflation bad?
C)Pros and Cons of dual mandate?
4)Why low IR environment creates bubbles?

Answer 1

A) Hyperinflation or high and usually accelerating rate of inflation is bad because it undermines thre main functions of money- store of value, unit of account, mode of payment.

When inflation is rising rapidly anyone who holds onto money suffers a reduction in the real value of that portion of his wealth in proportion to the inflation rate.

Hyperinflation makes sellers unwilling to accept the deteriorating currency as mode of payment. This in turn has a very bad impact on the economy-

• production will be decreased.

• Unemployment rate will go faster

• poor people will become even more poorer

• export will be expensive

• economy growth will decline rapidly and the economy will gradually move towards recession