What, If Any, Is The Link Between Inflation And Output In Your Essay

What, If Any, Is The Link Between Inflation And Output In Your Discussion Refer To Both Theoretical And Empirical Evidence - Essay shellWhen prices of domestic goods and services are rising fast this will generally be true also of wages, of the prices of the imported goods, of the m aney supply and of the prices of assets. This is because inflation is one sector of the economy permeates rapidly into other sectors. The phrase a lavishly rate of inflation therefore usually describes a situation in which the currency values of all goods in an economy are rising at a fast rate . The view commonly taken is that inflation should be kept close to zero prices should rise at no more than about 2 to 3 percent a year on average. This is because high inflation affects the economy adversely in a number of ways. For example, it distorts the income distribution because of the difficulty and risk associated with the complete index-linking of pensions tend to suffer. Also, it biases investment dec isions the cost of borrowing specie rises making debt finance expensive in the early years of a project and reducing the incentive to invest. In theory inflation accounting could localise for this, but in practice this has proved difficult to implement.