(a) Two favourable impacts of inflation are as follows:
1. Higher profits and Higher investment: Profit incomes of the producers are generally favourably affected by inflation, because they can sell their products at higher prices. The entrepreneurs and investors get added incentives to invest in productive’activities during inflation, since they can earn higher profits from such investments.
2. Possibility of higher income for Shareholders: During inflationary periods, if the companies earn higher profits, they can declare dividends for their shareholders. Hence, the dividend income of the shareholders may also rise during inflation.
Two unfavourable impacts of inflation are as follows:
1. Fall in the real income of fixed income groups: Real income means purchasing power of money income. Given the money income of the fixed income groups, the real income will fall during inflation. Hence, inflation affects workers, salaried people and pension earners adversely.
2. Inequality in the distribution of Income: The profit incomes of businessmen and entrepreneurs increase during inflation, while the real income of the common salaried people declines. So, the inequality of income and wealth becomes acute during inflation.
(b) Primary Functions of Money:
1. Medium of Exchange: Money acts as the most reliable medium of exchange. The major function of money is to facilitate the process of exchange by removing the defects of the barter system. Money has general acceptability and has purchasing power so everyone accepts it willingly in exchange for goods and services. It enables people to purchase anything that they want in exchange for money.
2. Measure of Value: In modem economies, money acts as a measure of value as the value of everything can be expressed in terms of money. The value of anything expressed in terms of money is known as its price. When we say that the price of a piece of cloth is Rs. 15, we mean that in order to obtain one piece of cloth we have to give up 15 units of money.
Secondary Functions of Money:
1. Store of Value: Wealth is usually kept in the form of money because money is the most liquid form of wealth. Since savings is usually done with a view to use the savings for purchasing some commodities or services, it is as if the values of commodities are being stored. Hence, money is called the store of value.
2. Transfer of Value: Money is also a means for transferring a given value from one individual to another. If any person purchases a commodity (say, wheat from the shopkeeper and pays Rs. 10 per kg of wheat purchased) then the value of that commodity can easily be transferred from the buyer to the seller through a payment in terms of money.