A mild inflation is beneficial for economic growth. Justify the statement.
Inflation is good
when it is mild. There are two situations where this occurs. The first is
when inflation makes consumers expect prices to continue rising. When
prices are going up, people will buy now rather than pay more lately. This
increases demand in the short term. As a result, stores sell more and factories
produce more now. They are more likely to hire new workers to
meet demand. It creates a virtuous cycle, boosting economic
growth.
The second is when it
removes the risk of deflation. That’s when prices fall. When that happens,
people wait to see if prices will drop more before buying. It cuts back demand,
and businesses reduce their inventory. As a result, factories produce less and
lay off workers. Unemployment rises, leading to wage deflation.
Workers have less money to spend, which reduces demand even more. Businesses
lower their prices. That makes deflation worse. For this reason, deflation
is even more corrosive to economic growth than inflation.
Prices
fell 10 percent during the worldwide Great Depression.
Inflation is good when it is mild. There are two situations where this occurs. The first is when inflation makes consumers expect prices to continue rising. When prices are going up, people will buy now rather than pay more lately. This increases demand in the short term. As a result, stores sell more and factories produce more now. They are more likely to hire new workers to meet demand. It creates a virtuous cycle, boosting economic growth.
The second is when it removes the risk of deflation. That’s when prices fall. When that happens, people wait to see if prices will drop more before buying. It cuts back demand, and businesses reduce their inventory. As a result, factories produce less and lay off workers. Unemployment rises, leading to wage deflation. Workers have less money to spend, which reduces demand even more. Businesses lower their prices. That makes deflation worse. For this reason, deflation is even more corrosive to economic growth than inflation.
Prices fell 10 percent during the worldwide Great Depression.
