Answer to Question 1
High and variable inflation rates make it almost impossible to set long-term contracts because prices and interest rates may be changing by the day, or even by the hour. In its extreme form, inflation can lead to a complete erosion of faith in the currency. Unchecked inflation can ultimately lead to hyperinflation. In addition, higher inflation rates make it difficult for households and firms to distinguish between changes in the relative prices of individual goods and services and changes in the general price level.
Answer to Question 2
High rates of inflation erode the value of a currency, which means that people will want to hold less currency. Higher inflation rates lead to higher nominal interest rates, which may induce more individuals to put money in the bank rather than allowing it to depreciate in their pockets. This might involve going to the ATM once a week rather than twice a month.
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