Which of the following is a potential benefit of inflation?

• A. It eliminates the need for monetary policy.
• B. It causes the value of money to increase over time.
• C. It always leads to higher unemployment.
• D. It can reduce the real burden of debt for borrowers.

Answer: (D)

Verified step by step guidance

1. Understand the concept of inflation: Inflation is the general increase in prices over time, which leads to a decrease in the purchasing power of money.
2. Recognize that inflation affects the real value of money and debts. When inflation occurs, the nominal value of money stays the same, but its real value (what it can buy) decreases.
3. Analyze how inflation impacts borrowers and lenders: Borrowers repay their debts with money that is worth less in real terms, effectively reducing the real burden of their debt.
4. Evaluate the given options by comparing them to the economic effects of inflation. For example, inflation does not eliminate the need for monetary policy, nor does it cause the value of money to increase; it decreases it.
5. Conclude that a potential benefit of inflation is that it can reduce the real burden of debt for borrowers, making it easier for them to repay loans in the future.