Question

Why are inflationary dangers lower in the high-income economies than in low-income and middle-income economies?

Short answer

The inflationary dangers were lower in the high income economies as compare to low and middle income economies.

Step-by-step solution

Step 1. Defintion

Inflationary danger refers to the harmful effects of inflation that negatively affects a country's economy. It includes reduction in the value of money, higher rate of interest and debts in the economy.

Step 2. Explanation

a) In the high income economies, most contracts, wage levels and interest rates are indexed to inflation, means that they will increase when inflation increases to retain purchasing power. Whereas, in the low income income and middle income economies, these wage levels, interest rates are not indexed to inflation.

b) In the low income and middle income economies, the problem of very high inflation generally arises from huge budget deficit, which are financed by the government printing its domestic currency. Thus, too much money chasing too few goods.