| Consider the following statements about the Inflation |
| 1. Inflation can lead to inequality in the distribution of income in an economy. |
| 2. Inflation can lead to recession in the many sectors of an economy. |
| Which of the statements given above is/are correct? |
A) Only 1
B) Only 2
C) Both 1 and 2
D) neither 1 nor 2
Correct Answer: C
Solution :
Inflation redistributes income from wage earners and fixed income groups to profit recipients, and from creditors to debtors. So far as wealth redistributions are concerned, the very poor and the very rich are more likely to lose than middle income groups. The inflationary growth is often followed by a recession. Also, if inflation is too high, the Central Bank and / or government may respond by tightening monetary or fiscal policy. This reduces inflation, but also causes a fall in aggregate demand and lower economic growth. Therefore, a recession is often caused by policies to reduce inflation.
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