Problem 1: Inflation is the general increase in prices with some prices rising faster than average and even some prices falling. Inflation attracts a great deal of attention among policy makers and some of the remedies for it can have serious consequences in production and employment. Why would you, as a business manager, care whether annual inflation is 2% or 20%?
Problem 2: What are some of the damaging effects deflation has on an economy? What would be a monetary policy prescription to reduce or eliminate deflation? How would deflation affect your business?