examine the impact and consequences of both inflation and deflation

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NFN007

Economics

econ 2301

University of North Texas

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A major concern of the Federal Reserve is to maintain stable prices.  It attempts to do so through influencing the money supply and interest rates.  You are to examine the impact and consequences of both inflation and deflation.

Address the following areas in your paper:
Identify the causes of both inflation and recession or deflation.
Identify the ways inflation and deflation can damage the economy and the society
What policies can the Federal Reserve use in trying to prevent inflation or deflation in the macro economy?  What are some of the short-term uncertainties and longer run risks in using these policies?  If you must accept a trade-off between higher prices or fewer jobs?  Which is the better choice and why?


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Running head: INFLATION AND DEFLATION

Impact of Inflation and Deflation
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INFLATION AND DEFLATION

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Causes of Inflation, Recession, and Deflation
Inflation is the increase in the general price level of goods and services in an economy
over a given period. Several factors can lead to inflation. An increase in money supply, higher
wages, or interest rate cuts results in demand-pull inflation (Jones, 2017). Demand-pull inflation
factors increase the consumer’s purchase power, which results in a situation of too much money
chasing few goods. In realization of the rise in demand for products and services, producers
increase the prices in anticipation of earning higher profits or alleviating excess demand (Free,
2010). When the increase in prices of goods is adopted on a broader scale, the general price level
increases. Increase in VAT (Value Added Tax), inflation expectation by producers of products
and services, devaluation, and higher wages increase the overall cost of production, which results
in cost-push inflation (Jones, 2017). Inflation ensues fr...

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