Economic Essay Questions Example | Topics and Well Written Essays - 1500 words

Economic Questions - Essay Example While low levels of inflation are manageable, higher levels can wreck havoc on an economy. Inflation at any level acts as an invisible tax on savers. Any money saved is capable of purchasing less goods and services. This harms vulnerable groups such as senior citizens who rely on savings more heavily than other groups. It also provides a disincentive to save. Also if growth is too rapid it can risk a shock to the system by bursting an economic bubble, like the tech bubble of the nineteen nineties or the recent housing bubble. Deflation and unemployment are the dangers of the recessionary side of the business cycle. Deflation is a decrease in the price of goods and services. The real danger of deflation is falling into a deflationary spiral. A deflationary spiral occurs when consumers expect prices to fall, so they delay spending. Retailers and suppliers need to provide goods and services so they lower prices. If consumers do not spend producers are forced to cut back on costs, including labor, which increases the incentive for consumers to save and not spend. Unemployment can soar and many firms can be forced to shut down. A deflationary spiral is part of the cause of the Great Depression. Unemployment above natural levels harms the economy its participants. People out of the work force longer than frictionally required can start to lose skills, which can limit long term employability. Unemployment also reduces the ability of families to provide necessities and luxuries for themselves. This is all compounded by the general negative psychological effects of unemployment on the unemployed. For the economy it is also harmful. It means productive capacity is idle and the amount of goods and services the economy can produce falls. It is necessary to intervene to protect against the dangers of inflation, deflation, and unemployment. Intervention can be taken