Impact of Inflation And Deflation On Economy


 
 
Concept Explanation
 

Impact Of Inflation And Deflation On Economy

1. Effects on Production:

  • Keynes felt that as long as there were unemployed resources in the economy a moderate or a mild dose of inflation might be in order: because this would lead to waves of optimism inducing businessmen to invest more. But this cannot go on forever because the limit is set by full employment ceiling, after which the prices start rising and moderate inflation starts assuming the nature of hyper - inflation which, in tum, has disastrous consequences on production.
  • It distorts the smooth functioning of price mechanism, hinders capital formation, stimulates speculative activities and hoarding, leads to misallocation of productive resources.
  • In short, inflation invites business to seek profits via manipulation of markets rather than via efficient production.
  • 2. Effects on Distribution:

  • Inflation has the effect of redistributing income because prices of all factors do not rise in the same proportion Entrepreneurs stand to gain more than wage earners or fixed income groups. Speculators, hoarders, black marketers and smugglers stand to gain on account of windfall profits.
  • Changes in the value of money also result in the redistribution of wealth partly because during inflation there is no uniform rise in prices and partly because debts are expressed in terms of money. Inflation is a kind of hidden tax, steeply regressive in character and in effects. This redistribution of wealth as a result of inflation puts more burden on those groups of the economy which are least able to bear it.
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