Describe the effects of inflation on the economy of a country.

Explanation

Effects of inflation on the economy of a country are:

(i) Inflation discourages savings. Since the real value of the sum saved falls in time of inflation, people will prefer to spend it now rather than later.

(ii) Inflation could have adverse effects on the balance of payments of a country. Imports will become cheaper than exports.

(iii) Inflation badly affects people living on fixed incomes. During inflation borrowers gain and lenders lose.

(iv) During the period of inflation, cost of production increases thereby increasing the prices of goods and services.

(v) The margin of profit to businessmen increases and more goods can be produced. Increase in production increases the level of employment.

(vi) During inflationary period, money completely loses its value and people prefer holding real assets.