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Explain five reasons why inflation would be undesirable in an economy.

      

Explain five reasons why inflation would be undesirable in an economy.

  

Answers


joseph
i. Reduction in profit: increase in price may lead to reduced sales volumes and this may results to reduced profits for firms.

ii. Wastage of time: this is where the individuals and firms may tend to waste a lot of time shopping around for reasonable prices.

iii. Increase in salaries and wages, through trade unions, employees pressurize employers to raise salaries in order to cope with inflation.

iv. Decline in standards of living: people with fixed incomes experience a decline in their standards of living as their purchasing power declines.

v. Loss to creditors, as creditors lend out money when its value is high, they are paid at a future date when its real value is low.

vi. Retardation of economy growth: inflation retards economic growth in that investors may not feel like venturing into new areas or expand their production.

vii. Loss of confidence in the monetary system: high level of inflation may reduce people’s confidence in money as a medium of exchange and store of value.

viii. Adverse effect on balance of payments: inflation increases price of exports thereby reducing their demand and this may adversely affect balance of payment.

ix. Discourages saving / monetary system: people tend to spend most of their earning leaving very little or nothing to save or invest.

joseph rimiru answered the question on December 26, 2017 at 19:50


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