Question

Under ideal conditions inflation should not have any blurring effect on price signals. If wages and prices are rising at a constant 20% then individuals should be able to adjust their expectations accordingly. For example, if the price of bread increased by 20% and the price of the input flour also rose by 20%, the sellers should know that the real price of bread has not changed. The market equilibrium quantity and price has not changed. Why does inflation in the real world result in shortages and surpluses?

Answer 1

Inflation in the real world can lead to shortages and surpluses because it makes it difficult for individuals and businesses to accurately determine the value of goods and services.

Step-by-step explanation:

In the real world, inflation can result in shortages and surpluses because it disrupts the ability of individuals and businesses to accurately gauge the value of goods and services. When prices are rising rapidly, it becomes difficult for sellers and buyers to determine the true relative worth of a product. As a result, sellers may overestimate the demand for their goods and overproduce, leading to surpluses, or they may underestimate demand and underproduce, resulting in shortages.