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Negative Effects Of The Federal Reserve System

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The Federal Reserve System is the central bank in the United States. The bank’s duty is to make sure they moderate the inflation and keep it around 2%. They moderate the 2 percent inflation through the monetary policy. While too much inflation is a bad thing, the economy is stagnant if there is no inflation. The bank keeping it at 2 percent helps the economy maximize employment and stabilizes prices in the economy. Zero inflation causes too many negative effects to the economy. Investments take a hit as well consumption levels going down. Fixed income investors lose purchasing power which leads to the investor losing their real rate of return. A lot people of deem inflation as a negative thing because of money illusions. A money illusion is …show more content…

The negative growth would cause companies to cut cages and then purge the money supply which would eventually lead to an economic turmoil. A negative growth in the economy means that there is a deflation in the economy and that is very bad. Japan got stuck into deflation because it just kept lowering it prices. They wanted to lower interest rates but they were already at zero so they did nothing about the economy causing it just to plummet. In a deflation, nobody would make investments and would rather keep cash on hand. The least skillful and experienced would also tremendously because in a case of recession, they would be the first people to …show more content…

Another reason that inflation more than zero percent is beneficial is because a low to no inflation rate could potentially cause a recession. Decreasing inflation may cause recession. Low inflation could lead to a recession. Targeting and increasing the inflation rate during a time of recession will help the economy come out of a recession. A higher inflation rate during a time of recession will allow the economy to emerge out of a recession. Many believe that higher prices will reduce your standard of living. Inflation translates to higher incomes and higher prices. This does not mean that people’s standard of living is necessarily decreasing. Productivity is the determining factor for the standard of living. When have disinflation to achieve zero inflation we have lower productivity in the economy. Many will not buy because they see prices continually drop. They will wait till deflation is stagnant before spending. Spending is the key factor to a successfully operating

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