The impact and consequences of both inflation and deflation.

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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?

 

 

 

Sample Solution

The impact and consequences of both inflation and deflation

Inflation occurs when the prices of goods and services rise. Deflation occurs when those prices decrease. The balance between these two economic conditions, opposite sides of the same coin, is delicate and an economy can quickly swing from one condition to the other. Inflation is caused when goods and services are in high demand, thus creating a drop in availability. Supplies can decrease for many reasons: a natural disaster can wipe out a food crop, a housing boom can exhaust building supplies, etc. Deflation can be caused by a combination of different factors, including having a shortage of money in circulation, which increases the value of that money and, in turn, reduces prices.

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