Inflation And Deflation

779 Words4 Pages
4.2 Reasons for inflation and deflation and ways to stabilize the economy
Inflation can be defined as the increase in prices of goods and services over a period of time. Whereas, deflation is decrease in prices of goods and services over a period of time.
In an inflation situation consumers stop spending money (as much they are used to), due to that production declines, it leads firms to cut down employees and exports will be dampened. Overall there will be a decline in the economy. So to overcome this a country can either use Monetary or Fiscal policy to stabilize the economy. If the country choose to use monetary policy the central bank should balance the price and output levels. Since there is more money circulation in the economy the central bank will have to adapt contractionary monetary policy to decrease the money supply in the market by selling securities, raising the reserve rate and increasing the discount rate. These actions will decrease AD and close GDP gap. Moreover if the country wants to use Fiscal Policy in an inflation situation the government should regulate changes in tax and their spending. In regulating tax policies and spending the government need time so the monetary policy is considered the best option when there is an inflation.
Deflation in an economy is considered a serious issue around the world because it is considered that it could turn a recession into a full blown depression. This happens due to prices of goods and services are already

More about Inflation And Deflation

Open Document