EFFECTS OF INFLATION
There are multi-dimensional effects of inflation on an economy both at the micro and macro levels. It redistributes income, distorts relative prices, destabilises employment, tax, saving and investment policies, and finally it may bring in recession and depression in an economy. A brief and objective overview of the effects of inflation is given below
1. On Creditors and Debtors
Inflation redistributes wealth from creditors to debtors, lenders suffer and borrowers benefit out of inflation The opposite effect takes place when inflation falls .
2. On lending
With the rise in inflation, lending institutions feel the pressure of higher lending. Institutions don't revise the nominal rate of interest as the 'real cost of borrowing falls inflation rises. the same percentage with which
3. On Aggregate Demand
Rising inflation indicates rising aggregate demand and indicates comparatively lower supply and higher purchasing capacity among the consumers. Usually, higher inflation suggests the producers to increase their production level as it is generally considered as an indication of higher demand in the economiy.
4. On Investment
Investment in the economy is boosted by the inflation (in the short-run) because of two reasons
(1) Higher inflation indicates higher demand and suggests enterpreneurs to expand their production level,
(ii) Higher the inflation, lower the cost of loan
5. On Income
Inflation affects the income of individual and firms alike An increase in inflation, increases the nominal value of income, while the 'real' value of income remains the same. Increased price levels etode the puchasing power of the money in the short-run, but in the long-run the income levels also increase. It means, in a given period of time income may go up due to two reasons, viz.. inflationary situation and increased earning. The concept GDP Deflator gives the idea of 'inflation effect on income over a given period.
6. On Saring
Holding money does not remain an intelligent economic decision 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. This is also known as the shoe leather cost of inflation. It
