The United States has experienced two currency collapses due to inflation. The first was the Continental Currency during the Revolutionary War, and the second was Confederation notes during the Civil War. Studying economics is crucial in order to comprehend business fluctuations, and how it impacts people’s finances and routine. Let’s suppose the government of an imaginary nation called Econland implemented a monetary policy that largely increased the supply of money and credit, and this resulted in a high inflation rate of more than 10%. Could you possibly imagine how this government action would impact the economy as a whole? To understand the ups and downs of the economy it is imperative to understand the connotation of inflation, its harms to the economy, and deflation in the Business Cycle. Inflation is defined as a prolonged increase in the general level of prices, and this has a direct impact on the purchasing power and the economy’s health. It is a result of an economic boom or peak (stimulated by various factors) when aggregate demand rises faster than supply can increase. In Econland, the monetary policy that increased money and credit supplying led to inflation. As Milton Friedman said, “inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in …show more content…
During the recession, exports are reduced due to the decrease in business (price) competitiveness in world markets, and this can have a significant impact on GDP. Businesses must also appeal to cutbacks and layoffs, and the uncertainty of the economy discourages investment. Moreover, a fall in real incomes leads to a fall in retail activity. In Econland, all of the above are very likely to happen. The combination of the harmful effects of inflation engenders the stagnation of the economy, leading to a