Sunday, April 26, 2009

why Bother About inflation ? (7)

we can sum up by saying that inflation needs to be prevented because it redistributes income ans wealth in arbitrary and potentially unjust way; because it complicates the task of the individual who wishes to smooth out his lifetime patterns of consumption and income; because it is a potential source of difficulty in the balance of payments ; because it imposes a variety of real costs both on individuals and on firm; and because it distorts the basic institutions of modern capitalist society.
some economists argue that these troubles would not be serious if inflation were steady and if exchange rates were flexible. For if the inflation rate were to settle at, say, a steady 5 per cent annum , year-in-year-out,an annual 5 per cent inflation rate would come to be generally expected, "interest rates would ultimately reflect the pace of inflation; salaries and other sticky incomes and the entire institutional framework would be increasingly adjusted, that is the bad redistributive effects of inflation would disappear. and if exchange rates were flexible, the ill effects on the balance of payments of more rapid inflation than in the rest of the world could always be nullified by an appropriate adjustment of the exchange rate.

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