Inflation tends to increase spending and encourage borrowing at the expense of savings. If prices are rising quicker than incomes, individuals will tend to buy at current prices before goods and services become more expensive and less affordable. Some consumers may buy using higher levels of debt (i.e., borrowing) than otherwise might the case. Savings may be discouraged because with high inflation when the money saved is repaid, it can be worth much less than when it was lent and the real rate of interest may be low. The real rate of interest rates fail to keep pace with inflation the saver loses purchasing power, i.e., their ability to buy things falls. Rising prices are a boon to borrowers because the repayment of interest and the sum borrowed (i.e., the principal) is with lower valued money. Inflation reduces the real value of the amount they owe, as the sum repaid has less purchasing power. Of course, any gain by borrowers must be weighed against the interest they must pay.
Inflation causes the average level of prices to rise so wouldn't consumers spend less because their purchasing power is now reduced?
This would lead to a fall in aggregate demand for goods and services and consequently firms would lay-off workers due to fall in derived demand. Isn't this how inflation creates unemployment in an economy? If people increase their spending then wouldn't firms increase their output, possibly increasing employment? :S
So perhaps your answer holds true for when the rate of inflation is RISING in the economy rather than when inflation simply exists.
