Why is a small amount of inflation (around 2%) considered healthy for an economy?
A. It helps reduce wages
B. It lowers the cost of imports
C. It encourages people to save all their money
D. It increases demand and supports steady growth
Answer (2)
The correct answer is D. It increases demand and supports steady growth.A small amount of inflation (around 2%) is considered healthy because it encourages spending and investment rather than hoarding money. When people and businesses expect prices to rise gradually, they are more likely to buy goods and services now rather than later, which stimulates demand. This steady demand helps businesses grow, hire more workers, and invest in innovation—supporting economic growth.
The correct answer is letter D. It increases demand and supports steady growthA low and stable inflation rate, around 2%, is considered healthy for a growing economy. It shows that prices are increasing slowly—not too fast, not too slow. This encourages people to spend money today rather than hoard it, which helps businesses grow and hire more workers.If there’s no inflation or prices are falling (deflation), people may delay buying things, thinking they’ll be cheaper later. But if inflation is just right, like 2%, people are motivated to buy now before prices go higher. This keeps money flowing through the economy, which means more jobs and production.In the Philippines, the BSP sets an inflation target of 2%–4%. When inflation stays in this range, it's easier for businesses to plan, workers to negotiate fair salaries, and investors to make long-term decisions. It’s a sweet spot that balances growth without making life too expensive.This level of inflation also gives the central bank room to adjust policies if a crisis happens. If inflation were zero, lowering rates wouldn’t help much. But with modest inflation, the government has more tools to stabilize the economy when needed.
