Question

Explain the effects of inflation on the following:

Distribution of income

Answer 1

Inflation redistributes income because the price of ail factors does not rise in the same proportion. Prices rise faster but incomes do not. There is an inequality in the distribution of income and wealth. During inflation, producers and traders are the gainers. Prices of their inventories (stock of goods and raw materials) go up, thereby increasing their profit. Prices rise faster than the cost of production. On the other hand, fixed income groups suffer during inflation because their incomes do not keep pace with the rising prices. As a result, the rich get richer and the poor get poorer.