QUESTION -Prelims-IAS –ECONOMICS MCQ-18
- Inflation redistributes wealth from creditors to debtors i.e. lenders suffer and borrowers benefit out of inflation.
- The opposite effect takes place when inflation falls (i.e. deflation).
- With the rise in inflation, lending institutions feel the pressure of higher lending. Institution don’t revise the nominal rate of interest as the ‘real cost of borrowing’ (i.e. nominal rate of interest minus inflation) falls by the same percentage with which inflation rises.
- Rising inflation indicates rising aggregate demand and indicates comparatively lower supply and higher purchasing capacity among the consumers.
- Investment in the economy is boosted by the inflation (in the short-run) because of two reasons:
Higher inflation indicates higher demand and suggests entrepreneurs to expand their production level, and
Higher the inflation lower the cost of loan.
- Holding money does not remain an intelligent economic decision (because money loses value with every increase in inflation) that is why people visit banks more frequently and try to hold least money with themselves and put maximum with the banks in their saving accounts. It means that saving rate increases.
- But this happens as a short-term effect of inflation. In the long-run higher inflation depletes the saving rate in an economy.
- Just the opposite situation arises when inflation falls or shows falling traits with decreasing saving in short-run and increasing saving in the long-run, respectively.
- Reflation is a situation often deliberately brought by the government to reduce unemployment and increase demand by going for higher levels of economic growth.
- Stagflation is a situation in an economy when inflation and unemployment both are at higher levels, contrary to conventional belief. Such a situation first arose in 1970s in the US economy.
- Economists usually distinguish between inflation and a relative price increase, ‘Inflation’ refers to a sustained, across-the-board price increase, whereas ‘a relative price increase’ is a reference to an episodic price rise pertaining to one or a small group of commodities.
- This leaves a third phenomenon, namely one in which there is a price rise of one or a small group of commodities over a sustained period of time, without a traditional designation.
- ‘Skewflation’ is a relatively new term to describe this third category of price rise.
- Repo rates are increased to control inflation
- Inflation can increase if production of a commodity is less.
- Thus to tackle this, government can reduce import duty to achieve sufficiency of that commodity in the market through imports.
- Increasing the minimum export price can reduce the export of that particular commodity.
- Many times, due to high exports, a commodity is in shortage in the local market and thus, leads to its high prices.
- This can be tackled by discouraging exports by increasing minimum export price.
- Government can also put export quota for a particular commodity.
- But if government increases that quota, then more item can be exported and it can create shortage in the domestic market leading to inflation.