Question

Write two paragraphs in agreement or disagreement with the statement "Low prices are good for the economy." Include at least 2 references in support of your argument.

Answer 1

Low prices are worse than higher prices. Low prices in an economy compel the firms to contract their level of output. This will reduce the overall output and employment and level of income. An economy’s growth is generally associated with higher level of production, higher level of income and output. To accelerate such a growth, the price level should be steady and high so as to maintain the business confidence. All supply side market forces are moving in direction of the price level. If the price level increases, profit if the firm increases, they will invest more and this increased investment creates more employment and income sufficient to market the products. Many of the countries maintain a desired level of inflation in order to prevent the economy from falling into a recession or a wild depression.

A fall in price creates pessimism in the mind of the businessmen. This pessimistic approach on the part of the investors reverses the operation of the economy. The fall in price will be accompanied by low production and employment and income. The great recession of 2009 indicates that once a downfall in price set in, it may turn in to a recession and sometimes into a wild depression. Because of this many economists and politicians recommend to maintain inflation upto a desired level in order to accelerate the phase of development. For example the Fed government maintains a targeted level of inflation at 2%.

Increasing price level is recommended on the ground that many of the economies are running below their productive capacity. Increasing price level helps them to use their unutilized capacity to the maximum. Thus inflation or steady increase in price level is the best way to reach fullemployment.

Increasing price level benefits the debtors which will encourage borrowing and spending.

The recommendation of A. W. Philip through his inverse relationship between inflation unemployment shows that a lower price level is associated with lower employment and income.

Not only the price increase to be moderately high but the increase in price should be stable. An unstable price level cause undesirable inflation expectation and the consumers postpone their purchase which may drives the economy to a downturn.

But increasing prices or inflation is not only a good servant, but it is a bad master too. Rising prices reduce the level of saving because the high price left the people with less income to save. The rising price redistributes income in favour of the rich and against the poor. The increase in oil price in the past years increase the input cost of many business firms which reduced their profit margin. The fall in profit margin compels the firm to reduce production which created devastating effect in employment and income of many of the countries in the globe. Crude oil price hiked into $80 per barrel since 2014. The high oil price created adverse effect on the cost of other production and manufacturing units across U.S. With the increasing oil prices India and other developing countries suffer from increasing deficit in their trade balances due to price hike in domestic market. In short the increasing price is good if it is under control . So it is generally said that inflation is a good servant but a bad master. For maintaining high growth potentials, the inflation must be under control.

The low price level in no way can be recommended in a growing economy since it creates low growth rate and reverse the process of development. J.M. Keynes recommends a mild and steady increase in price level so as to keep the aggregate demand at high level.