Article Notes

• What is the main reason to avoid inflation?

  It damages international competitiveness
• How does higher inflation in one country affect its exports?

  Exports become less attractive compared to others
• What uncertainty does inflation create for businesses?

  It complicates planning for future costs
• What is the relationship between uncertainty and investment during inflation?

  Uncertainty leads to less investment and economic activity
• What are menu costs?

  • Costs businesses incur when changing prices
• What are search costs?

  • Time, energy, and money spent finding transaction partners
• What is fiscal drag?

  It refers to reduced disposable income due to inflation
• Why is inflation particularly difficult for those on fixed incomes?

  They cannot adjust their income to rising prices
• What behavior do consumers exhibit during deflation?

  They postpone spending plans
• What can a deflationary spiral lead to?

  Further falling prices and postponed spending
• How does deflation affect unemployment?

  Unemployment will rise as businesses need fewer workers
• How does deflation increase the real value of debt?

  It takes a higher proportion of income to repay
• What challenge do businesses face when prices are falling?

  Cutting nominal wages becomes difficult
• What are the positive effects of 'good' deflation?

  • Increased profitability for businesses
  • Higher output and decreased unemployment
• What can cause 'good' deflation?

  Increase in aggregate supply (AS)
• What is a risk associated with 'good' deflation?

  It may turn into 'bad' deflation
• What can low and positive inflation indicate?

  It can accompany higher incomes and output
• How can inflation affect people's perception of prices?

  People may be happy if incomes also rise
• What is money illusion in the context of inflation?

  Workers misunderstand real vs. nominal values
• What are the conflicts between macroeconomic objectives due to inflation and deflation?

  • Policy changes for inflation can create new problems
  • Counter-inflation policies may hinder other objectives
  • Increasing AD can help eliminate deflation