Question

Explain economic processes and conditions under which inflation and deflation occur. What is normal for a growing economy like the US: inflation or deflation? Why?

Answer 1

When expansionary policies are applied and money supply increases that is higher than the growth rate of economy, then price level rises and inflation takes place. At this scenario, the trade deficit takes place and import is more than the export. Under inflation, people spend more and save less.

When, contractionary policies are implemented, money supply growth is slower than the economic growth and export getting more than the import, then deflation takes place.  When cost of production decreases and factors are available at a lower price, then price level decreases and deflation takes place. Under deflation, people save more and spend less.

It is normal to have inflation for a growing economy like the USA, because inflation is the reflection of increase in demand that boosts the economy and GDP increases. It creates new jobs as well. So, the economy grows. Hence, inflation is normal.