Monday, April 20, 2009

Effects of changing price on output and employment

Aside from redistributing incomes, inflation may effect the total real income and production of the community .
An increase in price is usually associated with high employment. IN mild inflation the wheels of industry well lubricated, and output is near capacity. private investment is brisk, job are plentiful. such has been the historical pattern.
Thus, many businessmen and union Spokesmen, in appraising a little deflation and a little inflation, used to speak of the latter as the lesser of the two evils. The losses to fixed-income groups are usually less than the gains to the rest of the community. Even workers with relatively fixed wages are often better off because of improved employment opportunities and greater take-home pay; a rise in interest rates on new securities may partly make up any losses to creditor; and increases in social security benefits, indexed to adjust for price-level changes, make up losses to the retired .
In deflation, on the other hand, the growing unemployment of labor and capital causes the community ’s total well-being to be less; so, in a sense, the gainers get less than the lessors lose. AS a matter of fact, in deep depression, almost everyone-including the creditor who is left with uncollectible debt-suffers.
the above remarks show why an increase in consumption or investment spending is thought a good thing in times of unemployment, even if there is some upward pressure on prices. When the economic system is suffering from acute depression, few criticize private or public spending on the ground that this might be inflationary Actually, most of the increased spending will then go to increase production and create more job and more real income .
But the same reasoning shows that once full employment and full plant capacity have been reached, any further increase in spending are likely to be completely wasted in price-tag increase .

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