(a) Highlight the difference between creeping inflation and hyper inflation. (b) List any four negative effects of inflation. (c) Outline four ways in which...

Answer Details

(a) Creeping inflation versus hyper-inflation

Creeping (mild) inflation is a slow, gradual and persistent rise in the general price level, usually in low single-digit percentages per year. It is manageable and can even accompany healthy economic growth. Hyper-inflation is an extremely rapid, severe and uncontrolled rise in prices, where the value of money collapses so quickly that prices may double within days or weeks. The essential differences are the speed and the severity: creeping inflation is slow and tolerable, hyper-inflation is galloping and destructive.

(b) Four negative effects of inflation

• It reduces the purchasing power of money, so real income falls.
• It hurts people on fixed incomes (pensioners, salary earners) and creditors, while borrowers who repay in cheaper money gain.
• It discourages saving, because money saved loses value over time.
• It creates uncertainty that discourages long-term investment and can worsen the balance of payments as exports become dearer.

(c) Four ways government can control inflation

• Monetary policy: the central bank raises the bank rate, sells securities through open-market operations, and raises the cash-reserve ratio to reduce the money supply.
• Fiscal policy: the government reduces its own spending and raises taxes to cut excess demand.
• Income (prices and wages) policy: restrain wage increases so that costs and demand do not push prices up.
• Output policy: increase the production and supply of goods and services (and encourage necessary imports) so that supply keeps pace with demand.