Question

1. In addition, to promoting economic growth which leads to reduced unemployment one of the goals of macroeconomic policy are stable prices. Why is stable price levels, the absence of inflation and deflation important? In your answer discuss the impacts of inflation and deflation on savers and debtors and spending.

Answer 1

To boost economic growth,having stable prices,absence of inflation and deflation is important.When prices are stable and inflation,deflation are absent;gross domestic product and national income of the economy gets accelerated.High gross domestic product and maximum national income is an indication of economic growth.To gain maximum national income and gross domestic product,it is important to stabilize prices.If prices of goods are stable, then purchases and sales will  remain constant.Consumers will be able to purchase more goods when prices are stable and producers tend to sell more goods as cost of production is not too highSince cost of production is low,companies tend to provide employment for unemployed people as there is need for humanpower in production process.This reduces unemployement level.Inflation shouldn't persist in the economy,as it destroys and declines the growth of economy.Cost of goods and services increases,if inflation exists.Consumers will not be able to afford to such costly goods and therefore purchases decrease.Inflation increases price of resources and raw materials, leading to high cost of production.Since,sales are low and cost of production is high,companies will decrease the output level,which causes low gross domestic product.Even deflation shouldn't persist in the growing economy. Deflation decreases prices of goods and services.Consumers expect further decrease in price of goods and will postpone the purchase of goods.This leads to low sales and companies will face losses.This reduces national income and gross domestic product causing halt to economic growth.So,it is important to maintain stable prices in the economy and absence of inflation and deflation is must.Inflation might be both advantageous and disadvantageous for savers.It is advantageous because if saver deposits his/her savings in banks,then high interest rates will be received but only after a certain time.It disadvantageous because amount of savings might decrease since cost of goods is high,saver need to more money while purchasing and might not be able save enough money.Debtors will be benefitted since they have to pay the amount with previous interest rates.They need not pay high interest rates caused by inflation.Spending is decreased when inflation is high.Consumers tend to compromise and will only opt to buy necessary goods.Even if prices are raised,sales of goods decreases.Unecessary goods are not purchased by consumers which decreases the spending of individuals.Deflation is benefits savers since goods and services are sold at low prices,cosnumers have to pay less income which leads to high savings.Deflation does not benefit debtors as they have to pay the same amount of debt,which they might feel costlier since the rate of debt is not revised in deflation period.Deflation has negative and positive impact on spending.Consumers wait for the prices to fall and will postpone their purchases,which causes low sales.Deflation even has positive impact on spending,since few consumers will spend more as price of goods and services decreased.

Hence,it is important for an economy to have stable prices and inflation,deflation shouldn't exist in growing economy.If all these things are maintained,then growth of economy will be boosted.