Why is a little inflation supposedly good for the economy?

Question

Too much inflation is certainly bad, but why is a little inflation better than no inflation?

Answer 1

One argument, which I tend to find somewhat disturbing was given by Gregory Mankiw in his undergradute textbook on macroeconomics called Macroeconomics. He said that inflation was a way for employers to decrease real wages while maintaining nominal wages at a constant level. He said that reducing someones nominal wage would be a very hard thing for a firm to do but inflation allows them to lower real wage.

I wouldn't necessarily say inflation is good but there is an assumed "natural" level of inflation in many macro economic models dealing with the subject.

For the answer provide below see expansion on this http://answers.yahoo.com/question/index;...

The phillips curve describes how unanticipated levels of inflation and increase or decrease employment / output. (increased employment, reduced unemployment, means greater output)

Answer 2

"It is impossible to have no inflation with out having a high unemployment rate and impossible to have no unemployment with out having a high inflation rate."

I think we could go through a high inflation period with low unemployment rates and then determine that this rate of prices is proper.  If we made the prices stick, theoretically employment would stick too because there would be an equilibrium already meet at current price/wage levels.  I believe in the long-run there is no trade off between inflation and unemployment.  We would, in the short-run, experience unemployment.  I know...Keynes said in the long-run, we are all dead.  And, I understand what he means, but experiencing a 2 or 3 year recession for a foreseeable future of complete employment and 0 inflation seems a good trade-off to me.  But, I am sure the "text book" would say otherwise.

Answer 3

Another theory has to do with the amount of inflation vs the unemployment rate. It is impossible to have no inflation with out having a high unemployment rate and impossible to have no unemployment with out having a high inflation rate.

So due to this, it is better to had a moderate inflation rate and unemployment rate. That's why it is completely healthy for an economy to be around 4% unemployment.