Question

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

a) High-income economies have more efficient central banks. Inflation is inherent in low-income and middle-income economies due to unstable institutions.
b) High-income economies experience lower demand-pull inflation. Low-income and middle-income economies face higher cost-push inflation due to resource constraints.
c) High-income economies prioritize price stability. Inflation is a natural consequence of economic growth in low-income and middle-income economies.
d) High-income economies benefit from lower production costs. Inflation in low-income and middle-income economies results from excessive government spending.

Answer 1

Inflationary dangers are lower in high-income economies due to the efficiency of their central banks, political consensus on price stability, and effective monetary policies. These economies are focused on preventing inflation from becoming entrenched, unlike some low-income and middle-income economies that may face institutional instability and less effective economic tools.

Step-by-step explanation:

The inflationary dangers are generally lower in high-income economies in comparison to low-income and middle-income economies. This difference is largely the result of several factors that include the presence of more established and efficient central banks and a political consensus targeting price stability. High-income countries have sophisticated monetary policies that can combat inflation effectively in the medium and long term. On the other hand, low-income and middle-income economies often deal with less stable institutions and economies that can make them more susceptible to both demand-pull and cost-push inflation.

High-income economies also focus on preventing inflation from becoming persistent and entrenched, recognizing the adverse effects of high inflation on economic productivity and the well-being of consumers and businesses. Central banks in these economies have the ability to learn from past experiences and utilize various economic tools to control inflation over time, which low-income and middle-income economies might lack.

This focus on stability means that high-income economies are less prone to the kind of inflationary spirals that can occur when inflationary expectations become unanchored, as can happen in economies with less established monetary policy frameworks.