Question

Why do we care about inflation? Explain in term of macroeconomics.

Why do we care about inflation? Explain in term of macroeconomics.

Homework Answers

Answer #1

We care about inflation because:

  • Fall in real purchasing power: Rise in price level cause purchasing power to fall because we are able to buy less units of goods once price rises with same money in the economy.
  • If you are a lender: Lender hurts from the inflation because they get the money back from borrower which have actually less purchasing power.
  • Fall in real wages: If workers are getting the same salary and there in inflation in the economy, they will get reduction in their real wages which induces them to produce less and result in fall in efficiency level in the economy.
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