C H 33 C ONSEQUENCES OF I NFLATION

I NFLATION … SO WHAT ? Brainstorm the stakeholders in an economy; list on the board Consumers, producers, government, borrowers, lenders, beneficiaries, e.g. unemployed, the rich, the poor How do you think each of these stakeholders are affected by inflation? Brainstorm in your group Inflation impacts festivities in India (2:11) German hyper inflation (5:14) Do getting started P151

C ONSEQUENCES FOR H OUSEHOLDS 1. Reduced purchasing power; if prices are rising faster than incomes, purchasing power (how many G&S can a fixed amount of money buy) decreases 2. Reduced value of savings; e.g. save 10% interest and the inflation rate is 20% After 1 year the saver has 1100$ but the price of 1000$ of G&S is now $1, As inflation increases so do i/r’s; so loan repayments become more expensive

C ONSEQUENCES FOR B USINESS 1.  resource prices. If these can’t be passed on to consumers, e.g. very competitive market the firm suffers 2. Workers are likely to demand  in wages which may cause conflict 3. Menu costs; must inform consumers of $ changes 4. Shoe leather costs; time & $ are used to look around for cheaper resources 5. Uncertainty causes unwillingness to invest/ expand / employ, etc… 6. Do Q1 P152

C ONSEQUENCES FOR THE ECONOMY 1. Inflation means domestic prices are relatively higher than other countries. Therefore our exports become more expensive and imports become cheaper. 2. Many government payments, e.g. pensions, benefits, ages of state employees, are index linked, i.e. linked to increases in RPI

I NFLATION & THE FUNCTIONS OF MONEY Functions of money Medium of exchange Store of value Unit of account Standard for deferred payment i.e. $ can be exchanged for G&S i.e. $ can be kept & used at a later date i.e. $ measures the relative values of G&S i.e. $ can be used to settle a debt

INFLATIONS EFFECTS ON THE FUNCTIONS OF MONEY Brainstorm in 4 groups & report back your ideas 1. Medium of exchange; in times of very high inflation $ becomes worthless & gold or other usable products become more valuable 2. Store of value; the value of savings or holding $ is eroded by inflation 3. Unit of account; prices become confused & distorted causes business uncertainty 4. Standard for deferred payment; the future value of $  meaning those in debt benefit & lenders lose out * Try exam practice P154