Explain the various changes in the rate of price in an economy.

Question

What will be an ideal response?

Answer 1

Answers will vary. The rate of price changes across an economy is a basic measure of economic well-being. Inflation means that prices, on average, are rising. Similar to unemployment, a low level of inflation is not so bad. It reflects a healthy economy-people have money, and they are willing to spend it. But when the Federal Reserve-the nation's central bank-manages the economy poorly, inflation can spiral out of control, which can lead to hyperinflation, when average prices increase more than 50% per month.When the rate of price increases slows down, the economy is experiencing disinflation, which was the situation in the United States in the mid-1990s and more recently in the second half of 2008. But when prices actually decrease, the economy is experiencing deflation, typically a sign of economic trouble that goes hand-in-hand with very high unemployment. People do not have money and simply will not spend unless prices drop. During the Great Depression in the 1930s, the U.S. economy experienced deflation, with prices dropping 9% in 1931 and nearly 10% in 1932.