High and uncertain inflation is damaging to the economy because

Question

Quizplus · Accepted Answer

High and uncertain inflation can have multiple negative impacts on the economy. One such impact is that the price system, which serves as a critical means of signalling changes in relative scarcity through changes in relative prices, is no longer able to perform this function effectively. In addition, individuals who receive their incomes in fixed nominal terms are made worse off, as the purchasing power of their earnings is eroded by inflation. This can lead to unexpected reallocations of real income between workers and firms. Similarly, high and uncertain inflation can lead to unexpected reallocations of real income between borrowers and lenders, as inflation erodes the real value of debt repayments. Thus, all of the above are accurate statements about the negative impacts of high and uncertain inflation on the economy.

High and Uncertain Inflation Is Damaging to the Economy Because