Equality or inequality has had been the underlying
objective of the redistribution of natural-resources or endowments within the
society or economy, has had been the subject-matter for Political-Economy or
Economics since inception which endorses returns or incomes according to the
productivity or marginal-product i.e. contribution to produce another unit of a
good or a service. Economists presuppose that any activity should increase
supply and demand, both, in order to justify investment or spending to keep the
economy going or to achieve higher economic-growth keeping the price-level or
inflation and unemployment stable since higher inflation or too much lower
unemployment would increase scarcity and the cost of factors of production,
like labour and capital i.e. wages and interest-rate, and would make the
economy uncompetitive. However, there is also a parallel or counter view that
inflation also reduces real-wages and real interest-rate; therefore it lowers
cost of production and increases competitiveness of firms and the economy.
However, if take a close look we might derive that lower real-wages and
interest-rate would lower demand and savings in the economy which might diverge
the economy from its long-run-equilibrium-path. On the other hand lower
inflation or disinflation or slow or controlled deflation might increase
real-wages and demand, and, real-interest rate and savings and lower nominal
interest rate on investment. Higher real returns on savings or capital is
likely to induce further investment by lowering nominal interest rate, probably
zero, lower inflation may increase real interest rate if nominal interest rate
is constant or reduce nominal interest rate when real-rate is constant, it is
expansionary both ways, higher real rate would increase savings and lower
nominal rates could increase investment, lower prices would help real interest
rate and savings and lower nominal interest rate would help increase investment.
On the contrary, higher inflation could reduce real interest rate and savings
and investment and the economic-growth rate. To conclude we may say that higher
prices though increase nominal variables like GDP or interest rate or wages,
but also reduce real GDP or interest rate or wages or economic growth and is
contractionary in terms or demand and supply, but lower prices might lower
nominal variables, but increase real variables and economic growth and is thus
expansionary. Moreover, higher inflation could stoke bubble fears which might
add to instability because the gap between nominal and real prices of assets
increase with inflation only to find later that there has been an oversupply
due to higher prices without matching demand which might result in price
correction, lower economic activity and higher unemployment. Lower-prices or
stability is important to avoid wild swings in the economy and achieve
full-employment. Notwithstanding, when the price-level is biased lower it
increases real-wages, incomes and profits too and when it is inclined higher
the society or economy loses their values, lower prices are important to
increase spending, consumption and investment, both, and increase government
spending, too, when there is scope to increase productivity while containing or
lowering cost and prices and increase competitiveness, and, increase supply and
demand and per-capita-income to reduce inequality and increase the standard of
living of the less privileged. When we try to cut costs by inflation we unconsciously
cut demand and supply by cutting real-wages and increasing nominal interest-rate,
respectively. Therefore, we might say that the economic-policies that increase
inflation and inflation expectations are the second best to the ones which
lower inflation and inflation expectations because it increases demand when the
population rate of growth is slowing in many parts of the World and might also
lower interest rate and interest rate expectations thereby increasing supply,
too… Probably, the statement that lower prices are more expansionary… is right…
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