Question

1. An essay question in which you are agreeing to: “Inflation is not all that bad”   

Zimbabwe inflation can be used as an example throughout the essay.

A) Examine THREE arguments agreeing this statement.

B) Please ensure that you provide an applicable example for EACH argument.

Answer 1

Inflation is not all that bad

Inflation is a quantitative measure which refers to the constant rise in general price level. This means that a unit of currency will now buy fewer goods than before. In other words, with rise in general price level; there is decrease in purchasing power. Hence, higher inflation is often considered detrimental for the economy. However, mild inflation can benefit the economy on following grounds:

1. Inflation helps the borrowers since there is a decrease in value of debt. For example, ‘A’ borrowed $ 100 from ‘B’ and promised to pay back after a year. However, after a year due to inflation, the purchasing power of $100 decreased (as explained in the definition). This $ 100 cannot buy the same basket of goods in future as it can now. Hence, the decrease in the value of debt benefited the borrower.

When inflation hit Zimbabwe, the borrowers (those who had to repay the loans) benefited since it was not possible to calculate the equivalence of the loan/debt in Zimbabwean dollars to foreign exchange.

2. Increase in Consumer Spending. There is an increase in demand for short term since the consumers prefer to buy products in the present since they fear the rise in prices in future. On the other hand, deflation cuts back the demand and consumer spending. For example, in India due to expected rise in prices of onion, there was a surge in demand for onions. This led to increased consumer spending.

3. Boost to the Economy. Since there is an increase in demand and consumer spending, companies produce more and employment is generated. In addition to new employment, there are also cases where existing worker’s wages also increased to compensate for inflation. For example, until 2006, the mild inflation attracted the investors in real estate since buying and selling of houses would mean earning more money. This led to a spur in construction activities to meet the growing demand of houses leading to creation of jobs. Another example of the same is that during the initial days of mild inflation, the wages of workers in Zimbabwe increased to offset the inflation.

Hence, it can be concluded that mild inflation is acceptable and can prove good for the economy as well.