Page 17 - DECO405_MANAGERIAL_ECONOMICS

Managerial Economics

Notes 3. Rise in the Government Expenditure: The government has to give unemployment insurance
benefits to the claimants. Hence the government will lose from both sides in terms of
unemployment benefits and loss of tax revenue.

1.6.3 Inflation

In economics, inflation is a rise in the general level of prices of goods and services in an economy
over a period of time.
A rising price level — inflation — has the following disadvantages:
1. It creates uncertainty, in that people do not know what the money they earn today will
buy tomorrow.
2. Uncertainty, in turn, discourages productive activity, saving and investing.
3. Inflation reduces the competitiveness of the country in international trade. If this is not
offset by a devaluation of the national currency against other currencies, it makes the
country's exports less attractive, and makes imports into the country more attractive,
which in turn tends to create unbalance in trade.
4. Inflation is a hidden tax on "nominal balances." That is, people who hold bonds and bank
accounts in dollars lose the value of those accounts when the price level rises, just as if
their money had been taxed away.
5. The inflation tax is capricious — some lose by it and some do not without any good
economic reason.

6. As the purchasing power of the monetary unit becomes less predictable, people resort to
other means to carry out their business, means which use up resources and are inefficient.

1.6.4 Economic Growth or Stagnation

!
Caution Stagnation is a period of many years of slow growth of gross domestic product,
in which the growth is, on the average, slower than the potential growth in the economy.

Causes of Stagnation

1. Population growth might high.
2. Fewer people might choose to work.
3. The growth of labor productivity might slow.

Stagnation is economic growth that, while positive, is less than the potential growth of the
economy. Some economists believe that stagnation is a serious problem and a cause of other
problems, but since identification of stagnation depends on one's idea of the potential, it remains
controversial whether the slowing we see is stagnation or a reduction of the potential.

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