ECO 561 Week 4, DQ 3 - Week 4 DQ 3 What are some of the damaging effects deflation has on an economy What would be a monetary policy prescription to

ECO 561 Week 4, DQ 3 - Week 4 DQ 3 What are some of the...

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Week 4, DQ 3What are some of the damaging effects deflation has on an economy? What would be a monetary policy prescription to reduce or eliminate deflation? How would deflation affect your business or a business you are familiar with? Deflation has several damaging effects on an economy and a business as well. Deflation is the reduction of the level of prices in an economy. The effects that deflation has is that it will cause the profits of businesses to fall, unemployment may increase, and the real value of loans that need to be repaid will rise. Deflation raises real wages which are both difficult and costly for management to lower. Deflation can cause the supply of money to decrease and an increase in goods and services where business will have an oversupply. This frequently leads to layoffs and makes employers reluctant to hire new workers, increasing unemployment. The other damaging effects of deflation include “creditors will benefit at the expense of debtors. And savers will discover that the purchasing power of their savings has grown because of the falling prices” (McConnell, Brue, & Flynn, 2009 p 534).Using the monetary and fiscal policy when needed to support the spending will stable inflation and reduce or eliminate deflation. Of course the best way to reduce or eliminate deflation, which causes trouble, is to not get into trouble. A monetary policy prescription to reduce or eliminate

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