What are the costs of inflation? Which is most important? How about deflation? Would that be a problem and for whom? The FRB worries more about deflation. Why? Do you agree? Why or why not?
The costs of inflation is that it effects the value of the economy’s medium of exchange, when overall price level rises the value of money falls. Inflation effects the money supply and demand. Inflation leads to higher borrowing costs. I think the most important is the effect on the money supply and demand. Deflation is the decrease in costs, or falling prices. The costs of deflation is falling price of wages, goods and services, and therefore job loses. The costs of deflation and inflation would be a problem for everyone. I agree that the FRB worries more about deflation. I think the effects on the economy is more severe. I think we have all experienced a moment that we felt like life was really expensive, especially myself living in a resort town. However, I was not as personally invested when the market crashed in 2008. I think this would have been really scary for investments, vs. being faced with a high cost. Right now there are is a lot of uncertainty with COVID 19 and the economy. I am starting to feel what a lot of people probably did back in 2008. We will see what happens.
Principles of Macroeconomics Spring 2020 