Examines the cause and effect of inflation and deflation, with particular focus on the role of the federal bank.
Written in 2004; 2,300 words; 8 sources; APA; $ 70.95
Paper Summary:
Maintaining relatively stable prices is one of the major concerns in all capitalist economies. History shows us that, left to its own devices,the capitalist economies undergo frequent "business cycles" that typically consist of a period of surging economic growth interrupted by economic crises,often accompanied by the collapse of the monetary system. Alternate bouts of inflation or deflation can also occur if the money supply in an economy is not controlled. Most advanced countries in the world take measures to keep the price stable. In the United States, the Federal Reserve Bank was created in 1913 to avoid such undesirable movements in the economy. This paper examines the causes and consequences of inflation and deflation and the role of the Federal Reserve Bank in the prevention of inflation and deflation and maintaining price stability. It also looks at the limitations of the Federal Reserve in this regard.
Paper Outline
Inflation Defined and its Measures
Types of Inflation
Causes of Inflation
Deflation: Definition and Measures
Causes of Deflation
How Inflation or Deflation May Damage Economic Stability
The Role of Federal Reserve in Ensuring Price Stability
Limitations of Fed's Role in Regulating the Economy
Conclusion
From the Paper:
"Keynesian economists emphasize the role of aggregate demand in the economy rather than the money supply in determining inflation. They believe that there is an inverse relationship between inflation and unemployment (as explained by the Philips curve ) and that price stability was a trade-off against employment. Keynesian theorists have also advanced the concept of natural Gross Domestic Product (a level of GDP where the economy is at its optimal level of production). According to this concept, if GDP exceeds its natural level, inflation will rise as suppliers increase their prices. On the other hand, if GDP falls below its natural level, inflation will decrease as suppliers attempt to fill excess capacity. (Ibid.)"
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