What is the usefulness of inflation - 275 Words

What is the usefulness of inflation? (Essay Sample) Content: Inflation: Is it always harmful?Inflation is an economic term that refers to the general and persistent increase in the price level of goods and services over a given period of time. This general rise in prices is normally caused by the interaction of market forces of demand and supply in the economy (Granville, 2013). Despite the fact that inflation results in negative effects to the economy, it has positive consequences to the market economy as discussed below.A low but stable rate of inflation can lead to increase in the level of investments and productivity. This happens when the businesses or producers raise the prices of the goods produced thus yielding high revenues. As a result of the drive for higher profits, most firms will expand their scale of operation by investing in capital and labor. In addition, the businesses may increase their wage rates and this may act as a psychological boost to the workers thus increasing the productivity.A general increase in t he prices usually translated into higher tax revenues to the government. Many indirect taxes such as the VAT are normally charged at the each unit of output. Consequently, an increase in prices will lead to an increase in the amount of tax revenue collected by the government. The revenue collected by the government can be used to finance important public projects such as improvement of infrastructure (Hall, 1982). Additionally, the government may use the inflation period to reduce the national debt since the real value of the debt dec...