Some economists believe that creeping inflation cannot be accepted because a gradual increase in prices leads to an ever-rising rate of inflation. Other economists argue that in order to achieve economic growth, some moderate price increases are necessary. Contrast and evaluate these two points of view.

Question

What will be an ideal response?

Answer 1

The argument in the first case is that even low levels of inflation impose a cost on the economy that reduces real output. Inflation can divert resources towards activities that are designed to protect against inflation. For example, during periods of inflation, businesses have to continually change prices and incur that cost, and households must spend extra time protecting the monetary value of their assets.
The argument in the second case is that mild inflation may be helpful for the economy. In recessions, inflation is typically not a concern. In periods of growth that are accompanied by expanding aggregate demand, the price level may rise, but if the increase can be kept low, then mild inflation may be beneficial. That is because mild inflation probably contributes to feelings of optimism as workers see their incomes rising and businesses see their profits are rising. These positive sentiments and expectations may contribute to increased spending and production that would help the economy grow.