The Monetary Policy Roller Coaster

1193 WordsJun 22, 20185 Pages
The innermost issue in macroeconomics is whether or not markets automatically bring economic equilibrium. If the free operation of market forces eventually resulted in a full employment level of national revenue with stable prices and economic growth, there would be no need for government to intervene. The actuality is that the government intrudes through their macroeconomic policies to attain policy goal and recover the performance of the economy. The government’s goal in macroeconomics is to stabilize prices. We can look at this and picture the government’s desire to a keep a low and stable rate of inflation. The reason for this is because there are a numerous of negative impacts associated with the high levels of inflation, such as,…show more content…
The economists have divided deflation in two parts, good deflation and bad deflation. Good deflation comes about from improvements in the supply side of the economy and increased productivity. A simple aggregate supply and demand diagram will illustrate that an increase in the long-run aggregate supply curve can result in an increase in real output and a fall in the price level. If the level of real output increases, then we can assume that there is a lower level of unemployment as more workers will be needed to produce the higher level of output. Bad deflation finds its source in the demand side of the economy. Another simple aggregate supply and demand diagram will illustrate that a fall in aggregate demand will result in a decrease in the price level and a decrease in real output. If real output decreases, then it is assumed that the level of unemployment will rise, as firms will need fewer workers if there is less demand. Both causes of deflation result in a fall in the price level, but we might say that the first is positive because it results in an increase in real output and a fall in unemployment, while the second is negative because it results in a fall in real output and a rise in unemployment. After reading inflation, deflation should be a good turn around but we shouldn’t confuse deflation with disinflation, which is the opposite of inflation and is defined as the drop in the inflation rate
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