Question

Which of the following inflations is most suitable for an economy?

• A. Hyperinflation
• B. Creeping inflation
• C. Walking inflation
• D. Running inflation

Hint:

Creeping inflation is generally considered healthy for an economy, promoting growth and stability while preventing the negative effects of high inflation.

Answer 1

The Correct Option is B

Step 1: Understanding Different Types of Inflation:
Inflation refers to the rate at which the general level of prices for goods and services rises, eroding purchasing power. Different types of inflation affect an economy in distinct ways. The main types of inflation include:
- Hyperinflation: This is an extremely high and typically accelerating inflation, often exceeding 50% per month. Hyperinflation can lead to a collapse of the currency and severe economic instability. It is not suitable for any economy.
- Creeping inflation: This is moderate inflation, typically between 1-3% per year. It is generally considered healthy for an economy because it encourages consumption and investment while allowing wages to adjust gradually. It is suitable for maintaining economic stability.
- Walking inflation: This refers to inflation rates that are slightly higher than creeping inflation but still moderate (around 3-10% per year). While it is not as harmful as hyperinflation, it can cause issues with purchasing power and economic stability.
- Running inflation: This refers to inflation rates above 10%, but not as extreme as hyperinflation. It can lead to increased cost of living and reduced purchasing power, which negatively affects savings and investment. Step 2: Analysis of Each Option:
- Hyperinflation: Causes severe damage to an economy, leading to loss of confidence in the currency and undermining economic stability.
- Creeping inflation: Represents a low, stable inflation rate, which is generally beneficial as it encourages spending and investment without causing significant economic instability.
- Walking inflation: Causes some economic harm, such as reducing purchasing power, but is still manageable.
- Running inflation: Higher inflation can cause significant problems, particularly for savers and fixed-income earners, and can lead to economic overheating. Step 3: Conclusion:
Creeping inflation is the most suitable for an economy because it encourages moderate economic growth and price stability without causing significant harm to purchasing power or economic stability.