Back to Projects JOIN WHATSAPP GROUP Free PSC MCQ 4 Lakhs+ Please Write a Review Current Affairs 2018 to 2022 PYQ 1200 Q/A Part - 1 PYQ 1200 Q/A Part - 2 PYQ 1200 Q/A Part - 3 PYQ 1200 Q/A Part - 4 PYQ 1200 Q/A Part - 5
Kerala PSC Indian Economy Book Study Materials Page 175Book's First Page
n lation and siness le 7.11 5. On Income effects of InflatIon Inflation affects the income of individual and There are multi-dimensional effects of inflation firms alike. An increase in inflation, increases the on an economy both at the micro and macro ‘nominal’ value of income, while the ‘real’ value levels. It redistributes income, distorts relative of income remains the same. Increased price prices, destabilises employment, tax, saving and levels erode the purchasing power of the money investment policies, and finally it may bring in in the short-run, but in the long-run the income recession and depression in an economy. A brief levels also increase (making the nominal value of and objective overview of the effects of inflation is income going upward). It means, in a given period given below: of time income may go up due to two reasons, viz., 1. On Creditors and Debtors inflationary situation and increased earning. The concept ‘GDP Deflator’ (GDP at current prices Inflation redistributes wealth from creditors to divided by GDP at constant prices) gives the idea debtors, i.e., lenders suffer and borrowers benefit of ‘inflation effect’ on income over a given period. out of inflation. The opposite effect takes place when inflation falls (i.e., deflation). 6. On Saving 2. On lending Holding money does not remain an intelligent economic decision (because money loses value With the rise in inflation, lending institutions feel with every increase in inflation) that is why the pressure of higher lending. Institutions don’t people visit banks more frequently and try to hold revise the nominal rate of interest as the ‘real cost least money with themselves and put maximum of borrowing’ (i.e., nominal rate of interest minus with the banks in their saving accounts. This is inflation) falls by the same percentage with which also known as the shoe leather cost38 of inflation inflation rises. (as it consumes the precious time of the people 3. On Aggregate Demand visiting the bank frequently tagging their shoe). It means that saving rate increases. But this happens Rising inflation indicates rising aggregate demand as a short-term effect of inflation. In the long- and indicates comparatively lower supply and run, higher inflation depletes the saving rate in higher purchasing capacity among the consumers. an economy. Just the opposite situation arises Usually, higher inflation suggests the producers when inflation falls or shows falling traits with to increase their production level as it is generally considered as an indication of higher demand in decreasing saving, in the short-run and increasing the economy. saving in the long-run, respectively. 4. On Investment 7. On Expenditure Investment in the economy is boosted by the Inflation affects both the forms of expenditures inflation (in the short-run) because of two reasons: —consumption as well as investment. Increased prices make our consumption levels fall as goods (i) Higher inflation indicates higher demand and services we buy get costlier. We see a tendency and suggests entrepreneurs to expand among the people to cut their consumption levels their production level, and aimed at neutralising the impact of price rise— (ii) Higher the inflation, lower the cost of loan (as shown above in no. 2) 38. Samuelson and Nordhaus, Economics, p. 674.