Recession: is a slowdown or a massive contraction in economic activities. A sign

Question

Recession: is a slowdown or a massive contraction in economic activities. A significant fall in spending generally leads to a recession. Such a slowdown in economic activities may last for some quarters thereby completely hampering the growth of an economy. In such a situation, economic indicators such as GDP, corporate profits, employment, etc., fall.  This creates a mess in the entire economy. To tackle the menace, economies generally react by loosening their monetary policies by infusing more money into the system, i.e., by increasing the money supply.

Which is more important, fighting recessions or fighting inflation?

Explanation / Answer

Determining that which one of the two is more pernicious for the Economy is a very contentious topic. While on one hand, the common man desires to have lower average price level in the Economy, and thus the common man would support deflation in a way as it leads to reduced average price levels in the Economy. On the other hand, the reduced price levels discourages the production of output by the producers, and thus deflation could turn on to be dangerous for the Economy.

I feel, it is slightly more important to fight deflation. According to the Phillip's Curve argument, a negative inflation i.e deflation could lead to increased unemployment. An increased unemployment for a long period of time in the Economy can further have negative effects like mass poverty and hunger. While on the other hand, an inflation of about 2-3% annually helps in raising price levels at decent rate, which inturn leads to steady increase in production. An increased production inturn leads to increased Employment, and thereby reducing the chances of mass Unemployment and Hunger in the Economy. This is also one of the reasons why Economists call inflation as helping to "grease the wheels of an Economy". Exorbitant high levels of inflation could at times be aided by the government by providing the poor with essential commodities from the already existing stock of goods. However, in case of excessive deflation, there will not be enough production in the economy that the government could aid enough number of people.

And thus I feel controlling deflation is more important than controlling inflation.

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