Inflation and Deflation

4 April 2015
This paper outlines the implication of inflation and deflation and provides some solution how to control it.

To understand the implication of inflation and deflation, the author outlines the functions of money and of the price system. He defines terms such as Price Stability and Consumer Price Index. The paper discusses the history of business cycles and the associated problems. He concludes with a discussion methods to control the economy.

Graphs
ISLM
Target Inflation
Pricing
“Price stability exists when prices overall are stable, which is the same as the permanent value of money. This does not mean that prices are fixed, but rather that taken on the whole they are stable when measured relatively. Indeed, in an environment of price stability, one would expect some prices to be rising but other to be falling. The main function of the price system consists in guiding the productive structure and the market system requires the enforcement of private property because the price becomes the expressions of those interactions of individual valuations through the use and disposal of what is owned. These interactions of the individuals participating are the market modifies the relative price structure according to the changes that take place in their individual valuations. By contrast when the general prices level of goods and services have persistent and relatively large increase we have inflation and when prices move predominantly down we have deflation.”

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