Answer to Question #197613 in Macroeconomics for Ayyash

Question

  Identify one type of inflation and outline its main causes Analyze its impact of inflation on both individuals and businesses,

Answer 1

Deflation: Deflation is negative inflation where the price level of the economy is falling instead of increasing. Deflation can lead to some serious economic damage and can push the economy ito depression, This type of inflation occurs typically during a recession or when asset bubbles burst. For example, the Great depression of 1929 saw huge levels of deflation,

Costs of inflation:

Inflation reduces the value of money over time. High inflation which is unexpected can decrease the wealth of a person significantly.

It leads to uncertainty in the market thus decreasing stability.

Real income falls and thus people can afford fewer goods.

Other costs associated with inflation such as shoe-leather cost and menu cost SHoe leather cost gives the number of time a person has to visit the Bank during inflation, Similarly, menu cost reflects the cost of changing the menu frequently by restaurants.