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Inflation has multidimensional effects on the economy. Which of the following is/are correct regarding the effects of inflation?
1. Lenders suffers and borrowers benefit out of inflation.
2. In the short run, investment in the economy is boosted.
3. Burden of tax payer is increased as they are forced to pay increased taxes.
1. Lenders suffers and borrowers benefit out of inflation.
2. In the short run, investment in the economy is boosted.
3. Burden of tax payer is increased as they are forced to pay increased taxes.
Select the correct code from below.
- a)1 only
- b)1 and 3 only
- c)2 and 3 only
- d)All the above
Correct answer is option 'D'. Can you explain this answer?
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Inflation has multidimensional effects on the economy. Which of the fo...
There are multi-dimensional effects of inflation on an economy both at the micro and macrolevels. It redistributes income; distorts relative prices; destabilises employment, tax, saving andinvestment policies and finally it may bring in recession and depression in an economy.
I. On Creditors and DebtorsInflation redistributes wealth from creditors to debtors i.e. lenders suffer and borrowers benefitout of inflation. The opposite effect takes place when inflation falls (i.e. deflation).
II. on InvestmentInvestment in the economy is boosted by the inflation (in the short-run) because of tworeasons:
a. Higher inflation indicates higher demand and suggests enterpreneurs to expand theirproduction level, and
b. Higher the inflation, lower the cost of loan
III. on TaxTax-payers suffer while paying their direct and indirect taxes. As indirect taxes are imposed advalorem (on value), increased prices of goods make tax-payers to pay increased indirect taxes.Similarly, due to inflation, direct tax (income tax, interest tax, etc.) burden of the tax-payersalso increases as tax-payer’s gross income moves to the upward slabs of official tax brackets(but the real value of money does not increase due to inflation; in fact, it falls).
Most Upvoted Answer
Inflation has multidimensional effects on the economy. Which of the fo...
Effects of Inflation on the Economy
Inflation, defined as a sustained increase in the general price level of goods and services in an economy over time, has several multidimensional effects on the economy. The correct options regarding the effects of inflation are:
1. Lenders suffer and borrowers benefit out of inflation:
- When inflation occurs, the value of money decreases over time. As a result, lenders who provide loans at a fixed interest rate will receive repayment in money that has a lower purchasing power. This means that lenders suffer a loss in real terms as the value of the money they receive back is less than what they initially lent out.
- On the other hand, borrowers benefit from inflation as they are repaying their loans with money that has a lower purchasing power. This effectively reduces the real burden of debt for borrowers.
2. In the short run, investment in the economy is boosted:
- Inflation can lead to a temporary increase in investment in the economy, especially in sectors that tend to benefit from rising prices. This is because investors anticipate higher profits from their investments due to increased prices and potential demand for goods and services.
- Inflation can create a sense of urgency among investors to allocate their funds to productive assets in order to protect their wealth from eroding due to inflationary pressures.
3. Burden of taxpayers is increased as they are forced to pay increased taxes:
- Inflation can lead to an increase in government revenue through higher tax collections. As the prices of goods and services increase, the nominal incomes of individuals and businesses also rise. This results in higher tax liabilities for taxpayers.
- However, in real terms, the burden of taxes may not increase significantly if the increase in incomes matches the increase in prices. It is important to consider the impact of inflation on both nominal and real incomes when assessing the burden of taxation.
In conclusion, inflation has multiple effects on the economy. Lenders suffer while borrowers benefit, investment in the short run is boosted, and taxpayers may face an increased burden due to higher taxes. Therefore, option D, "All the above," is the correct answer.
Inflation, defined as a sustained increase in the general price level of goods and services in an economy over time, has several multidimensional effects on the economy. The correct options regarding the effects of inflation are:
1. Lenders suffer and borrowers benefit out of inflation:
- When inflation occurs, the value of money decreases over time. As a result, lenders who provide loans at a fixed interest rate will receive repayment in money that has a lower purchasing power. This means that lenders suffer a loss in real terms as the value of the money they receive back is less than what they initially lent out.
- On the other hand, borrowers benefit from inflation as they are repaying their loans with money that has a lower purchasing power. This effectively reduces the real burden of debt for borrowers.
2. In the short run, investment in the economy is boosted:
- Inflation can lead to a temporary increase in investment in the economy, especially in sectors that tend to benefit from rising prices. This is because investors anticipate higher profits from their investments due to increased prices and potential demand for goods and services.
- Inflation can create a sense of urgency among investors to allocate their funds to productive assets in order to protect their wealth from eroding due to inflationary pressures.
3. Burden of taxpayers is increased as they are forced to pay increased taxes:
- Inflation can lead to an increase in government revenue through higher tax collections. As the prices of goods and services increase, the nominal incomes of individuals and businesses also rise. This results in higher tax liabilities for taxpayers.
- However, in real terms, the burden of taxes may not increase significantly if the increase in incomes matches the increase in prices. It is important to consider the impact of inflation on both nominal and real incomes when assessing the burden of taxation.
In conclusion, inflation has multiple effects on the economy. Lenders suffer while borrowers benefit, investment in the short run is boosted, and taxpayers may face an increased burden due to higher taxes. Therefore, option D, "All the above," is the correct answer.
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Inflation has multidimensional effects on the economy. Which of the following is/are correct regarding the effects of inflation?1. Lenders suffers and borrowers benefit out of inflation.2. In the short run, investment in the economy is boosted.3. Burden of tax payer is increased as they are forced to pay increased taxes.Select the correct code from below.a)1 onlyb)1 and 3 onlyc)2 and 3 onlyd)All the aboveCorrect answer is option 'D'. Can you explain this answer?
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Inflation has multidimensional effects on the economy. Which of the following is/are correct regarding the effects of inflation?1. Lenders suffers and borrowers benefit out of inflation.2. In the short run, investment in the economy is boosted.3. Burden of tax payer is increased as they are forced to pay increased taxes.Select the correct code from below.a)1 onlyb)1 and 3 onlyc)2 and 3 onlyd)All the aboveCorrect answer is option 'D'. Can you explain this answer? for UPSC 2024 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about Inflation has multidimensional effects on the economy. Which of the following is/are correct regarding the effects of inflation?1. Lenders suffers and borrowers benefit out of inflation.2. In the short run, investment in the economy is boosted.3. Burden of tax payer is increased as they are forced to pay increased taxes.Select the correct code from below.a)1 onlyb)1 and 3 onlyc)2 and 3 onlyd)All the aboveCorrect answer is option 'D'. Can you explain this answer? covers all topics & solutions for UPSC 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Inflation has multidimensional effects on the economy. Which of the following is/are correct regarding the effects of inflation?1. Lenders suffers and borrowers benefit out of inflation.2. In the short run, investment in the economy is boosted.3. Burden of tax payer is increased as they are forced to pay increased taxes.Select the correct code from below.a)1 onlyb)1 and 3 onlyc)2 and 3 onlyd)All the aboveCorrect answer is option 'D'. Can you explain this answer?.
Inflation has multidimensional effects on the economy. Which of the following is/are correct regarding the effects of inflation?1. Lenders suffers and borrowers benefit out of inflation.2. In the short run, investment in the economy is boosted.3. Burden of tax payer is increased as they are forced to pay increased taxes.Select the correct code from below.a)1 onlyb)1 and 3 onlyc)2 and 3 onlyd)All the aboveCorrect answer is option 'D'. Can you explain this answer? for UPSC 2024 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about Inflation has multidimensional effects on the economy. Which of the following is/are correct regarding the effects of inflation?1. Lenders suffers and borrowers benefit out of inflation.2. In the short run, investment in the economy is boosted.3. Burden of tax payer is increased as they are forced to pay increased taxes.Select the correct code from below.a)1 onlyb)1 and 3 onlyc)2 and 3 onlyd)All the aboveCorrect answer is option 'D'. Can you explain this answer? covers all topics & solutions for UPSC 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Inflation has multidimensional effects on the economy. Which of the following is/are correct regarding the effects of inflation?1. Lenders suffers and borrowers benefit out of inflation.2. In the short run, investment in the economy is boosted.3. Burden of tax payer is increased as they are forced to pay increased taxes.Select the correct code from below.a)1 onlyb)1 and 3 onlyc)2 and 3 onlyd)All the aboveCorrect answer is option 'D'. Can you explain this answer?.
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