- 5 Marks
Question
The global economic challenges have largely been fueled by demand-pull inflation or cost-push inflation. Many governments have initiated measures to mitigate the associated effects.
Required:
Outline FIVE (5) effects inflation have on an economy.
Answer
Effects of Inflation on an Economy:
- Reduction in Consumer Purchasing Power:
Inflation decreases the purchasing power of consumers as the value of money declines, leading to higher prices for goods and services.
(1 mark) - Reduction in Investor Confidence:
High inflation can reduce investor confidence in the economy, leading to lower levels of investment and economic growth.
(1 mark) - Economic Growth Slows Down:
Persistent inflation can slow down economic growth as rising costs reduce consumption and investment.
(1 mark) - Uncertainty in Business and Financial Planning:
Inflation creates uncertainty for businesses and individuals in planning their finances, as the real value of income and expenses becomes unpredictable.
(1 mark) - Rise in Unemployment Levels:
As businesses struggle with rising costs, they may reduce their workforce, leading to higher unemployment levels.
(1 mark)
- Tags: Economic Impact, Inflation, Macroeconomics
- Level: Level 1
- Topic: The external environment
- Series: DEC 2023
- Uploader: Theophilus