The Pros And Cons Of Inflation

In a market economy there is a regularity of up and down moments. When the prices of goods and services start to increase, the economy can only expand so far until it starts to slow considerably .These goods and services rising are called inflation. Demand pull inflation, is when the demand of the goods and services in an economy rise at a much faster rate than the economy has room to produce (Pride, Hughes, & Kapoor, 2014).Once prices rise to an unsustainable level, is called a bubble and typically leads to a recession. During a recession GDP is contracting, people have less disposable income, and production goes down (Pride et al., 2014). However, the government implements strategies to keep the economy growing at a steady pace. These strategies are refereed to as monetary and fiscal policies. Both monetary and fiscal policies want to stabilize and grow the economy at a steady rate, but they go about doing them in different ways. The monetary side manages the interest rates, as well controls the flow of money

This was when everyone was buying a stock with ".com" at the end the of it. The high demand for technology companies drove their stock prices to unsustainable levels. When investors began to realize these companies were not going to be profitable, they began to sell them. Many investors lost considerable wealth in these investments. In 1997 the Fed 's monetary policy was to raise interests from 5.5% up to 6.6% in 2000. This raised the interest rate to curb the inflation primarily caused by the heavy investing of ".com" companies. After the burst of the ".com" bubble in the year 2000 the Fed ultimately lowered the Fed Funds Rate beginning in 2001 to 1.75% after cutting it nine times. As you can see during times of inflation the Fed Fund Rate is raised to slow down inflation and when it is lowered the thought process is to try to stimulate the