Effects Of Inflation

What are the effects of inflation on consumers?

Lowers the real value of income/purchasing power of consumers, affecting their material standard of living.

Inflation results in redistribution of income; with those benefiting from the expense of others.

What are the factors that affect the disposable income of consumers?

• Fixed VS Variable Income Earners

• Debtors VS Creditors

• Savings

How does fixed and variable income earners affect disposable income

Fixed income: fall in real income

Variable income: workers warn income that varies with prices will not see erosion in real income

How does debtors and creditors affect the purchasing power of consumers?

Unanticipated Inflation: debtors are able to have their debts reduced by the price increase.

Anticipated Inflation: Lenders increase money rate of interest maintain real rate of interest.

How do savings affect consumers during inflations?

Cash wealth → real value is eroded by inflation

Tangible assets (gold) → appreciates in tandem with inflation; shielding purchasing power from erosion of inflation.

What are the effects of inflation on producers?

Income derived from profits depend on the type of inflation experienced

What are the effects on income of producers during inflation?

• Income redistribution between employers and employees

• Investments

Income redistribution [diff economic scenarios]

• Mild demand pull inflation —- rise in profits as when product prices are rising, production costs usually lag behind

• Cost push inflation — fall in profits; rising COP especially when there is no excess demand for the good, making it difficult for firms to offset the full effects of rising costs to consumers.

Investments

• Mild demand pull inflation: profits are high; tend to be stimulated by prospects of high returns, stimulating investments (optimism)

• Cost-push inflation: profits badly affected; prices cannot rise fast enough to match increase in costs

• Unanticipated inflation: uncertainty in returns of investments (ROI), less willing to take risks and invest

What are some effects of inflation on Governments?

• Impacts on Economic Growth

• Impact Balance of Payments

• Impact Exchange Rate (of country)

• Social Discontent

How does inflation lead to impacts in economic growth?

Inflation results in uncertainty of returns of investments; firms less likely to invest in country.

Significant fall in (I) of AD=C+I+G+(X-M); leads to fall in real GDP [reverse multiplier] and cause recession

How does inflation lead to impacts on BOT?

When inflation in a country outpaces the rate of inflation of other countries…

Exports become expensive; less attractive, quantity demanded falls (domestic exports), assuming that domestic products are price elastic, substituted by imports, MTP fall in demand for domestic products.

Imports become cheaper; more attractive, demand for imports rises.

How does inflation affect a country’s exchange rate?

Significant depreciation; demand for currency falls from fall in export revenue, supply of currency increases from the rise in import expenditure

Investors shift their money out of the country (outflow).

How does inflation lead to social discontent

Poverty and hardship (affect SOL); spurs people to incite social disorder