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Effect of Inflation

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tionEffect Of Inflation, Pro and Cons Of Inflation

This graph above show the inflation rate and gdp rate in Malaysia for the year 2005 until 2012. The effect of inflation on economic growth is debatable and can act as either a positive or a negative influence. Local and international researchers have conducted studies on the relationship of Malaysia’s inflation rate and economic growth. It can be concluded that over the past decades, there has been a general non-linear relationship between inflation rate and economic growth in Malaysia. However, in the long run inflation has a positive effect on Malaysia’s economic growth. This correlates with econometric study as they too reported a positive impact of inflation in the long run. Pro & Cons Of Inflation

Inflation may have a positive effect in Malaysian economy. This is because deflation is very harmful, inflation enables adjustment of prices and wages and boost economy growth. The first advantage is deflation is very harmful. Deflation is a negative effect of inflation. For example, the Japanese economy has suffered lower growth because of deflation. When prices are falling people are reluctant to spend money because they are concerned that prices will be cheaper in the future, therefore, they keep delaying purchases. Second advantage is moderate inflation enables adjustment of prices and wages. It is argued a moderate rate of inflation makes it easier to adjust relative wages and prices. For example, it may be difficult to cut nominal wages (workers resent wage cut). But, if average prices are rising, it is easier to increase good workers’ wages more than unproductive workers. Third advantage is inflation can boost growth. At times of very low inflation the economy may be stuck in a recession. Arguably targeting a higher rate of inflation can enable a boost to growth. This view is controversial. Not all...