Business Economics

Running head: BUSINESS ECONOMICS
Business economics
Name of the student
Name of the University
Author note

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BUSINESS ECONOMICS
Table of Contents
Answer 1....................................................................................................................................2
Answer 2....................................................................................................................................3
Answer 3....................................................................................................................................5
Reference list and bibliography.................................................................................................7

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BUSINESS ECONOMICS
Answer 1
Inflation is known as the quantitative measure of the rate where the price level of a
basket of commodities along with the services of an economy goes up over a period of time.
In the Euro area, the inflation is measured by the Harmonised Index of the Consumer Prices.
The main work of the European Central Bank is to see that the price is stable in nature which
means the rate of inflation should be below 2% over the medium term. The European Central
Bank Consumer Price Index in the year of 2018 is known to be 10.94%. inflation is the terms
used when there is rise in the prices of both goods as well as services1.
Figure 1 Inflation in Europe
There are several advantages as well as disadvantages of inflation in the economy. The
advantages of inflation are as follows:
1 Braun, Benjamin. "Speaking to the people? Money, trust, and central bank legitimacy in the age of quantitative
easing." Review of International Political Economy 23.6 (2016): 1064-1092.

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BUSINESS ECONOMICS
 It boosts growth: when the rate of inflation is very low in nature, the economy will be
in a recession. When the rate of inflation will be high, it will lead to an increase in the
economic growth.
 Adjustment of the wages: inflation can also make the adjustment of wages possible.
Moderate rate of inflation makes it much easier for adjusting the rate of inflation to
the relative wages and therefore help in increasing the wages of the productive
workers. when the rate od inflation will be zero, there can be real wage
unemployment where firms will not be able to attract workers.
 Rise in employment: according to the most of the economist’s inflation can lead to
rise in employment2. The increasing unemployment therefore can be fought with the
increased inflation. The inverse relation between inflation and unemployment can be
defined with the help of Philips Curve. It can be therefore said that rise in inflation
will lead to rise in employment as the economy will be no longer experiencing
recession.
 Preventing paradox of Thrift: inflation is very necessary for preventing the paradox
the thrift. Paradox of thrift will result in reduction of aggregate demand, less
production, increasing layoffs along with faltering economy. Therefore, inflation can
help in preventing paradox of thrift.
Inflation can become quite problematic in nature when the rate will be increasing
above two percent. High rate of inflation can be a serious issue where hyperinflation can
also wipe away people’s savings. The disadvantages of inflation are as follows:
2 Rogoff, Kenneth. "Dealing with monetary paralysis at the zero bound." Journal of Economic Perspectives 31.3
(2017): 47-66.