Discuss how inflation and recession affect the economic environment.

Question

What will be an ideal response?

Answer 1

Answers will vary. Inflation is a measure of the decrease in the value of money, generally expressed as the percentage reduction in value since the previous year, which is the rate of inflation. If inflation is 5 percent, you can expect that, on average, prices have risen by about 5 percent since the previous year.Therefore,unless pay raises are matching the rate of inflation, then one's purchasing power is reduced by that percent of inflation. In creating marketing strategies to cope with inflation, managers must realize that, regardless of what happens to the seller's cost, the buyer is not going to pay more for a product than the subjective value he or she places on it. No matter how compelling the justification might be for a 10 percent price increase, marketers must always examine its impact on demand. Many marketers try to hold prices level for as long as is practical.A recession is a period of economic activity characterized by negative growth. More precisely, a recession is defined as occurring when the gross domestic product (GDP) falls for two consecutive quarters. Gross domestic product is the total market value of all final goods and services produced during a period of time.While thecauses of the recession are very complex, this one beganwith the collapse of inflated housing prices. Those highprices led people to take out mortgages they could notafford from banks that should have known the moneywould not be repaid.