Economic Policy - Questions

Topics: Inflation, Monetary policy, Money supply Pages: 3 (627 words) Published: September 14, 2013
Questions economic policy

• Point out the reasons why it's worth an economy has a low inflation

Low inflation promotes the efficient use of productive resources . Conversely , when inflation is high time some individuals and some of the economic resources are invested in the search for mechanisms to fend off inflation. For example , when inflation is high, companies should allocate more resources to the management of its portfolio to avoid financial losses . These are unproductive uses that do not generate wealth to society . Low inflation reduces uncertainty . It has been observed that high inflation economies also have a more variable inflation . The uncertainty may adversely affect the expected return on investment and therefore growth in the long term. The biggest uncertainty also implies uncertainty in relative prices , so that prices lose their informative about future prices and marketing margins increase. All this affects the efficient allocation of resources and economic growth slows . Low inflation encourages investment . The most important economic decisions made ​​by individuals and companies are usually long-term decisions : decisions to a factory, a business, the decision to educate , to buy housing . These decisions depend crucially on the degree of uncertainty about the future . A low and stable inflation is an indicator of macroeconomic stability that helps people and companies to make investment decisions with confidence. Low inflation prevents arbitrary redistribution of income and wealth, especially against the poor. Employees and retirees have less mechanisms to protect against inflationary erosion of their income. The income indexation clauses do not exist or are very rare. In Colombia , for example , wages and pensions of retirees are adjusted once a year . Furthermore, the lower the income of individuals is more likely to have fewer defenses against inflation , such as savings or real estate . Therefore, rising inflation means a...
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