Transcript In Times of inflation….

In times of inflation….
what happens to the value of money?
The purchasing power ( real
value ) of money falls
It means that fewer goods are bought
with the same amount of money.
In times of inflation….
what happens to the cost of living?
The cost of living rises.
It means that more money is needed
to support the same living standard.
Living standard measures
the amount and types of goods and
services that can be consumed.
Distributive effects of
(unanticipated or unexpected)
inflation
• Who gain ?
• Who lose, in times of inflation ?
Who lose? Who gain ?
• fixed income earners
• pensioners
• insurance policy
holders
• money lenders
• depositors
•
•
•
•
•
real asset holders
insurance companies
bankers
borrowers
government
Why lose ? Why gain?
• holders of money lose
because the real value
( purchasing power )
of money falls.
• Who ? e.g.fixed
income earners;
pensioners; insurance
policy holders; money
lenders; depositors
• holders of real assets
( such as properties,
jewellery ) gain
because the values of
these assets rise.
• money debtors gain
because the real value
of the debt falls.
In times of inflation...
what happens to the cost of
production?
Production cost rises.
How does a rise in production cost
affect the exports of the economy?
Exports become more expensive
and thus less competitive in the
world market.
In times of inflation….
what happens to government tax
revenue?
Tax revenue increases because
• As nominal income increases during
inflation, more people fall into the tax net.
As income tax is based on nominal income,
people pay more tax to the government.
• Business firms pay more profit tax because
business turnover may increase during
inflation.