IASNOVA
1.On creditors and Debtors
-Increase in inflation-Lenders suffer, borrowers benefit
-Decrease in inflation-Vice-versa
2.On lending
-Lending institutions suffer with higher lending when inflation increases.
-Decrease in “real cost of borrowing” = Inflation rate
3.On Aggregate Demand
-Increase in inflation suggests rising aggregate demand, lower supply and higher purchasing capacity.
4.On Investment
-Inflation increase boosts investment( in the short-run) due to following reasons-
a) higher inflation suggests higher demand
b) higher the inflation, lower will be the cost of loan
5.On Savings
-with rise in inflation- Savings rate increases in SHORT TERM and decreases in LONG TERM
-with decrease in inflation- Savings rate decreases in SHORT TERM and increases in LONG TERM.
6.On TAX
-Tax payers suffer in case of both Direct and Indirect taxes-because-
a) Increased prices of goods make tax payers to pay more indirect taxes.
b) Tax payers gross income moves to upward slabs of official tax brackets but the real value of money does not increase.( bracket creep or inflation induced tax increase)
Solution– Inflation indexing of tax provisions
- Effect on government’s tax collection– Inflation increases the nominal value of the gross tax collection while the real value of tax collection does not compare with the current pace of inflation. Why? Because there ia a lag in tax collection in all economies.
7.On Exchange Rate
-With increase in inflation the currency of the economy depreciates if it follows flexible currency regime.
8.On Export
-Volume of exports increases
-Value of exports decreases
-Hence,export income increases in the economy.
9.On Import
-Foreign goods become costlier
-Advantage of lower imports and Import substitution with rising inflation.
-This advantage is not applicable in case of compulsory imports ( oil,technology,drugs etc) and the economy loses more foreign currency.
10.On Trade Balance
-Inflation is favourable for trade balance of developed economies.
-Inflation is unfavourable for trade balance of developing economies- due to compulsory imports and composition of foreign trade.
11.On Employment
-Increases in short term
-Becomes neutral or negative in the long run
12.On Wages
-real value of wages decreases, nominal value increases
-decreases the purchasing capacity and living standard of life
13.On Self Employed
-Neutralising impact in short term
-Negative effect in the long term
14.On Economy
-A particular level of Inflation is good for economy- “comfort zone” of inflation- 4 to 5 % in case of India.
-Beyond the limits of comfort zone inflation may lead to recession to depression.
