Inflation and deflation
Benefits of inflation
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The potential benefits of inflation include:
A low and stable inflation rate caused by increasing demand may make firms feel optimistic about the future. In addition, if prices rise by more than costs, profits will increase, which will provide funds for investment.
Reduce the burden of debt:
Real interest rates may fall due to inflation or may even become negative. This is because nominal interest rates do not tend to rise in line with inflation. As a result, debt burdens may fall.
For example, those who have borrowed money to buy a house may experience a fall in their mortgage payments in real terms.
A reduction in the debt burden may stimulate consumer expenditure
This could lead to higher output and employment.