Question

1. Given the choice, which is a worse scenario: recession or inflation?

2. What are the "benefits" and cons of each happening?

3. Which scenario do you think we can recover from faster? A recession or a period of Inflation?

Answer 1

1) Recession is worst scenario because it hampers economic growth . the economy produces below potential and resources are wasted . Low inflation , on the other hand , can be beneficial as it accelerates economic growth .

2) Pros and cons of inflation : Deflation can be a bane for the economy because as prices decline people expect prices will decline further and so delay purchases , which leads to a halt in money circulation and thus economic stagnation . Opposite happens in case of inflation , people expect prices to rise further . Debtors if real interest rates are negative win from inflation . Producers are also winners if prices rise faster than costs of production . Inflation at a low level helps economy to prosper better .

Inflation erodes the real value of money , fixed income earners suffer , shoe leather cost and menu costs of inflation are the negative aspects . Savers are losers if real returns are negative .

Pros and cons of recession : falling prices help fixed income earners and people on pensions , assets become cheaper such as land and property , new firms find a way to setup because costs are low etc .

Recession causes a negative demand shock which slows down the economy , lack of demand causes unemployment and loss of resources and low production .

3) We can recover faster from a recession as little expansionary policies will push demand upwards . There is more money in circulation will mean more demand , which will cure recession . But contractionary policies has some time lag . Once prices have risen , it takes time to fall back .