.
INFLATION
1. -Imports will become so expensive
-Income from abroad will dwindled/diminish
-Imported inflation may set in
-Local investment becomes very expensive
2. - Reduction in profit due to rise in price and reduced sales volume
- Wastage of time when for reasonable prices around
- Decline in standards f living due to decrease purchasing power
- Loss to creditors
- Retardation of economic growth as people are reluctant to take risks
- Adverse effects on the balance of payment as export becomes more
expressive leading
- to a fall in their demand
- Loss of confidence in monetary system
3. - Increase in money incomes/salaries and wages
- Lower taxation on personal income
- General shortages of goods and services
- Effects of credit creation by commercial banks
4. - Reducing tax on inputs
- Restricting imports
- Wage harmonization measures
- Price harmonization
5. - Encourages investment
- Creating employment
- Creates improvement to infrastructure
- Motivation to work
- Benefits to both the sellers and debtors
6. - Reduction in profits
- Wastage of time
- Increases in wages and salaries
- Decline in standard of living
- Loss to creditors
- Retardation of economic growth
7. i) It causes a deficit in the balance of payment
ii) It weakens a country’s currency hence discouraging savings
iii) It discourages investment due to reduced savings
iv) It may cause industrial unrest
v) It cause decreased standards of living
vi) It hampers development plans
vii) It leads o uneven distribution of income
INFLATION
1. Negative effects of inflation to an economy.
i. People loose confidence in local currency as its difficult to use in
transaction when it loses value very fast.
ii. Hinders implementation of development plans since the cost of projects
increases.
iii. Leads to unfair distribution of income as the rich become richer than the
poorer.
iv. Lead to low standard of living /poverty as people find it difficult to get
basic need due to high cost of living.
v. Discourages savings/investments since people fear their money will loose
value/as they have less disposable incomes.
vi. Leads to balance of payment deficits as imports are highly demanded than
exports.
vii. Hinders implementation of development plans since the cost of projects
increases
viii. Encourages social evils as people resort to bad /immoral practices to
get money.
ix. Discourage lending and borrowing this is due
x. will loose when their money loose value.
2. (a) Effects of positive inflation to the economy
Debtors will pay less
Sellers will buy commodities at low prices
Motivation to work
Increase in investment
High profits due to high prices
Increased job opportunities resource use
b) Reasons why the government may adopt the delocalization policy of
locating industry
Reduced effects of occurrence of war
Provision of employment opportunities in rural area
Reduces rural urban migration
Encourages balanced regional development
Market for locally produced raw materials
Locals are able to access goods easily
3. Five causes of inflation in an economy;
Increase in government expenditure making more money available to people
which increase aggregate demand leading to an upward pressure on prices
Excessive credit creation by commercial banks increase money supply and
hence purchasing ability leading to inflation
Increase in money income which increase purchasing power causing an
upward pressure on price of goods and services
Shortage of goods and services leading to excessive demand hence pulling he
prices of commodities upwards
Cramour for increase in wages and salaries which will be reflected in the
increased prices of commodities
Increase in indirect taxes (e.g. VAT) which make firms to increase their prices
Increase in profit margins by management and shareholders leading to an
increase in prices
Increase in cost of inputs(e.g. raw material)causes the price of finished goods
to be high
Reduction in subsidies leading to an increase in cost of production which will
be reflected in an increase in the price of the commodities
4. Mild inflation - A type of inflation where the general prices of goods and
services increase
slowly at a single digit rate of less than 10%
Hyper inflation - It is a situation whereby the general prices of goods and
services are
extremely high whereby the rate is in thousands and millions percent
per year
Demand pull inflation - Comes about when there is excessive demand for
goods and services in
the economy causing arise in prices
- In this situation there is to much money in the economy chasing very few
goods and services
Cost push inflation - It results from an increase in the total production costs
of goods and
services leading to an increase in prices of
commodities
-It is the high costs of production that pushes the prices of goods and services
up
Imported inflation - It results from trading with foreigners whereby prices of
foreign goods
affect domestic prices
High prices of foreign goods [imported goods] increases domestic prices of goods due
to domestic demand
