IGCSE Economics Paper-2: Specimen Questions with Answers 4 - 4 of 100

Passage

Inflation has dire economic consequences. Inflation is regarded as a serious social and economic problem.

Question 4 (4 of 5 Based on Passage)

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Trace the effects of inflation.

Explanation

Inflation has socio-economic consequences. Inflation is considered as a serious social and economic problem. The effects of inflation on the economic system are categorized into three different kinds:

  • Effect on production: A moderate rise in price has a favorable effect on production when there are unutilized or underemployed resources in existence in an economy. Business person are induced to invest more and as a result, employment, and output increases. But when inflation has reached advance stage, its brighter aspect disappears and evil aspect manifests them.
  • Distribution effect: All producers, traders, and speculators gain during inflation because of the windfall profits which arise, because of prices rise at a faster and higher rate than the cost of production. But the interest, wages, and rent do not rise at a increasing rate and are more or less same. Moreover, profits increase as there is a lag between rise in prices and rise in cost of production.

  • Effect on Consumption and welfare: Inflation implies an erosion of the consumer value of money. It is a form of taxation. Because of the falling purchasing power, the real consumption of the common people also falls. Increase in the cost of living at the time of inflation implies reduction in the standard of living and lowering of economic welfare of the community. A galloping inflation is the cruelest form of taxation.

  • Social and political consequence of inflation: Continuous inflation in ac country creates a breeding ground for social and political upheavals. Inflation redistributes income and wealth in favor of the rich and widens the gap between the rich and poor, thereby aggravating social injustice.

Socio-Economic Consequences

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