Question

How does inflation affect the economy's level of output

Answer 1

Ans.) Inflation is the sustained increase in the general price level. If the rate of inflation increases, this means that many people are purchasing too much, thus leading to a rise in demand and cause icrease in opportunity cost of holding money which may discourage investment and savings and if inflation were rapid enough, shortages og good as consumers begin hoarding out which may result in rise in future prices and when demand rises this leads to balance of payments to disequilibrium. That is a rise in inflation leads to an increase in imports while exports fail. But on a positive side, if inflation is controlled employment increases which may result in growth of the economy. This is how inflation affect the economy's level of output.