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  • Created by: FunkyFrog
  • Created on: 07-06-14 13:50
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  • Costs of Inflation
    • Reducing Inflation: undesirable by governments
    • Declining international competitiveness: high inflation - increases pries of exports. Demand for exports declines. Government needs for exchange rate to fall (short run approach)
    • Confusion and Uncertainty: When there is high inflation, people are uncertain about what to spend their money on.
      • Due to low consumer demand, there will be negative multiplier effect
        • Long run, low growth
    • MENU COSTS
      • SHOE LEATHER COSTS
    • Redistribution of Income: Borrowers worse off under high inflation than lenders. However, this depends on the real rate of interest
    • Boom & Bust Economic Cycles: High inflationary growth is unsustainable and usually ends in recession

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