Question

A) What is the healthy side of inflation? What’s the target set by the Federal Reserves for inflation?

B) Treasury securities (bonds, bills, notes) are viewed as a safe investment, but inflation works against them. Explain how.

C)Is an economy better off with no inflation, low inflation, or high inflation? Explain.

Answer 1

A)Inflation has many healthy benefits.Some of them are follows

1.A moderate inflation is a sign of healthy economy as economic growth is often accompanied by some form of inflation.

2.Profits generated by producers are increased by inflation thus fueling the economy.

3. Better investment returns

4.Moderate rates of inflation helps prices to reach their equilibrium.

5.It prevents deflation which has very harmful effects on the economy.

Desired target range set by the Federal Reserves is 1.7% to 2% which is moderate range if inflation ensuring growth

B)If the returns generated by Treasury securities are less than inflation the prices of the securities gets severely affected.Increase in inflation decreases the price and increase the yield.

This has a negative impact on the securities market

C)The economy is better off with low inflation.

No inflation can pave the way for deflation which is damaging to the economy.Delfation can put companies out of business and cut the production capabilities of a country

Inflation is preferred because it enables easier repayment of debts and government itself take debts.

A slowly increasing price levels can bring profits for companies and this will in turn increase the economic output of a country.

While high inflation can raise the price unrealistically high that consumers will be demotivated from buying and production will start taking a toll.

Also a low inflation encourages investments and lowers cost of borrowing

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