What impact does high inflation typically have on an economy?

High inflation typically erodes purchasing power and can lead to economic instability. This occurs because as prices rise, consumers find that their money buys fewer goods and services than before. This diminishing purchasing power can cause uncertainty and anxiety among consumers and businesses alike, leading to reduced spending and investment.

When inflation is high, individuals may start to spend rapidly, trying to buy goods before prices increase further, which can create further demand-pull inflation. Additionally, businesses might face increased costs for materials and labor, putting pressure on profit margins and potentially leading to cost-cutting measures like layoffs or price increases, further destabilizing the economy.

Stable currency values in international markets and encouraging saving and investment are generally outcomes associated with low and stable inflation, rather than high inflation. Similarly, while consumer spending may temporarily increase due to fear of prices rising, it is not a sustainable positive effect of high inflation. Thus, the correct answer accurately highlights the detrimental effects that high inflation can have on economic health.