inflation BW

Bell work 10/09/2012

1.       Explain the reasons gov. aim to maintain a low and stab rate of inflation.

There are many costs to inflation and deflation and this is why gov. aim to mainatain a low and stable rate of inflation

Loss of purchasing power- when inflation rises faster than wages, people lose purchasing power.

Effects on savings- when inflation ries faster than the interest rate, negative savings can occur.

Effects on interest rates- when inflation occurs, banks mist raise interest rates in order to maintain profits from lending money

Effects on international comp.- when inflation occurs, goods produced domestically become less appealing to foreigners.

Uncertainty- when inflation occurs and banks raise interest rates, business confidence drops, uncertainty occurs and firms spend less on investment.

Labor unrest- if labor feels wages are not kept up with inflation- disuputes and riots occur

Costs of deflations

Unemployment- when AD is low, businesses tend to lay of workers

Effects on investment- during deflation firms make less, they then lay of workers

Costs to debtors- value of loans decrease

2.       What is the difference between deflation and disinflation?

Disinflation is a slower rate of inflation, inflation is still going up, just at a slower pace

Deflation is a negative inflatin rate

3.       Which is worse inflation or deflation? Why?

Argued that deflation is worse since the country will experience less output, experience unemployment and possible fall into a deflationary spiral