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Chapter 32: Q.28 (page 782)

Why are inflationary dangers lower in the high-income economies than in low-income and middle-income economies?

Short Answer

Expert verified

High-income countries are better-equipped than low-income countries.

Step by step solution

01

Step 1. Introduction

Inflation refers to the situation of sustained increase in the general price level. It causes the value of cash balances to fall as the purchasing power of money declines.

02

Step 2. Explanation

The harmful effects of inflation on investment in the economy and overall economic output are referred to as inflationary danger, In high-income countries, contracts, wages, salaries, etc are all indexed to inflation. So, a rise in inflation is accompanied by an increase in wages in salaries. This reduces the harmful impact of inflation. Low and middle-income countries generally do not have this arrangement causing a decrease in purchasing power and other negative impacts.

Low-and middle-income countries face higher inflation rates because of budget imbalances. These imbalances in the budget may result from inadequate management of funds received from various sources.

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