Inflation is like a tax; it erodes the value of holders and savers
of money. One dollar today will buy less tomorrow. A balanced inflation rate is
a product of an economy working well and is part of the FRB monetary policy.
The textbook discusses many of the costs of inflation including rising
costs, menu costs, price variability, confusion, inconvenience and more
detrimentally, can redistribute wealth from the generally poorer population of
debtors to the wealthier loaners of credit. Menu costs is a new term for me, but
I understand it effect on decisions of cost. Changing the cost of items, due to
increase in costs from inflation or other factors has many costs associated with
it from customer education to the printing of catalogs and other literature.
The Federal Reserve Board should worry about deflation as deflation
can be a sign of deeper economic problems which could be on the horizon. Deflation
is unpredictable, unstable, and can result in a redistribution of wealth away
from debtors, who are often poorer.
The book mentions Thomas Friedman who points out that deflation
causes reactions in the economy which would lower the nominal interest rate, which
lowers the cost of saving. The major factors which deflation are a decrease in
demand, or growth in supply. With the economy struggling in certain sectors from
our current pandemic situation and operating nominally or better in others. If
deflation started to occur now it would be signaling a broader problem in the
state of the economy.
0 comments:
Post a Comment