What Are The Advantages And Disadvantages Of Inflation?


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Meg Hayes answered
The actual definition of inflation can vary slightly depending upon the context, but it is usually defined as a continuous increase in the prices of services and goods. A country's currency e.g. The dollar, the pound or the euro, the value does not say the same when there is inflation and even the purchasing power of that currency can go down. This means that your money that you have earned will only be able to buy less of a particular service of product. The cause of inflation is the subject of debate by many economists, but most of them have come to agree that it can be both good and bad.

• The advantages of inflation

One advantage of inflation is called anticipated inflation, which is generally taken to mean that an economy is healthy and thriving. In anticipated inflation, the demand for a product is growing a lot faster than the supply, therefore the price of that product goes up. However to have that high demand, there must be people who are willing to spend their money. If the inflation has been predicted by economists and is therefore expected, then the economy will most likely follow with a little bit of a negative effect. In order to keep a good economy, banks will reduce interest rates and companies will raise pay.

• The disadvantages of inflation

The opposite of anticipated inflation is unanticipated inflation, which is when the prices of goods rise suddenly and unexpectedly, often with rather severe consequences. This type of inflation results in members of the public who are living on fixed incomes to slow down their spending or stop completely. These uncertain times will make companies reluctant to hire which means that there are more people unemployed, so they have no money which means that they cannot spend money. This is the financial crisis that the world is facing at the moment.

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