The Pros And Cons Of Inflation

The U.S. economy seems to be back on track in 2016, with improved labor statistic, constructive GDP, and profitable businesses. Since 2008 the US economy has improved enormously by recovering from major losses due to monetary flaws within the economic system. Following the recession, many Americans were left unemployed and with little or no motivation to find work. Since then the improvement of the economy many of them have been drawn back to employment. Leading our economy towards a promising recovery in hopes of a full boom. A chance of inflation is a direct side effect to the newly thriving economy. Inflation is defined as a sustained increase in the general level of prices for goods and services.(What is Inflation). As a way to avoid inflation …show more content…
What interest rate hikes really does in turn is it makes it harder for the banks to borrow money. So what happens is banks start to borrow money from other banks. For example, let 's say that there was a hike and I was the CEO of Chase I would have to look around for other means to borrow money before I have to increase my own interest rates on loans. So I would look to other banks like Bank of America and Wells Fargo in turn borrowing money from them so that puts me in the clear to cover my customers. Now in turn that might hurt Wells Fargo and Bank of America because what if they have a spike in people wanting to collect their money out of the banks now they are in a whole so it shortens the circulatory money supply. So then Bank of America and Wells Fargo will ask how can they collect on money in another way without borrowing money from people or other banks, they look at all of their customers who have a variable interest rate (an Interest rate that is not fixed and can change at any time). These customers will then get a notice saying that their interest rate has changed and their monthly bill will increase. So now these consumers and business with these variable interest rates have been effected in a negative way so people with car loans that might have already been in a bad situation are in an even worse situation. In turn …show more content…
It will increase the interest rate, which will decrease investment as well as aggregate demand, which will result in lower GDP on contrary as previously said. As this graph shows, the reduction of aggregate demand will lower the price level and lower Real GDP. Contractionary monetary policy restrains inflationary pressures. Business and individuals will spend less and save more which also shift the aggregate demand to the left just like the graph shows. Consumer spending will decline because cost of living is increasing because of the rise of interest

Related Documents