Federal Reserves
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Federal Reserves
The Federal Reserve Bank is tasked with regulating the flow of money in the US market and thus control the rate of inflation through various mechanisms e.g., regulate the bank’s lending rates ( ). The presence of inflation increases American GDP growth and taxes in the form of raised Federal Reserve lending rates, which is the exact opposite of deflation (Wells, 2017). It majorly explains why the Federal Reserve Bank prefers inflation as opposed to deflation.
In any given economy, the cost of even low rates of inflation would mean a reduction in employment rate and retardation in GDP development (Wells, 2017). To achieve a zero state of inflation, without deflation knocking, a cut in wages in the labor market is experienced (Wells, 2017). It eventually degrades the productivity level of the economy and paralyzes trade within the same economic status. Therefore, the cost impact of even low rates inflation would mean a stagnating economy accompanied by a retarded GDP.
Unemployment reduced money supply in the economy, advanced technology, and lower production costs may serve as some of the causes of deflation in any given economy (Wells, 2017). The reduced flow of money in the market may be a result of various reasons e.g., a global pandemic like Covid-19, a situation that encourages savings and regulated monetary expenses by the consumer.
Lastly, causes of deflation may be productive or destructive to any economy depending on their nature and impact. Reduced production costs and advanced technology are causes of inflation that generate a productive impact in any economy. Deflation that results from unemployment leads to increased poverty levels hence a negative impact on economic growth. Thus reasons for deflation might be positive or negative to the economy.
References:
Wells, D. R. (2017). The Federal Reserve System: A History. McFarland.