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?
For the economy it can lead to lower levels of investment and lower economic growth. For an individual, it can lead to a fall on the value of their savings and their income. People will have to pay higher taxes. The cost of deflation is an increase in interest rates. Reduces employment resulting from wage rigidity, there is also loss of government revenue. It is a problem for the government, businesses and individuals in debt. IT decreases economic growth. People in debt will pay higher interest rates, business owners will have to drop their prices which, will result in less profit. The FRB worries more about deflation because it brings less productivity to the economy and it is a lot harder to reverse.
Netsy's Thoughts 