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Importance of price stability

If a nation desires to have stable prices (or low inflation), why not simply pass a law that prohibits firms from changing prices?

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In economics, inflation is an increase in the general level of prices of a given kind. General inflation is referred to as a rise in the general level of prices.

Inflation is the opposite of deflation. Disinflation refers to slowing the rate of inflation, that is, prices are still rising, but at a slower rate than before. Reflation is a term used to denote inflation after a period of deflation, meaning inflation designed to restore prices to a previous level.

Importance of price stability

Savers and lenders might want some insurance against the uncertainty of the future value of their money, ie a higher rate of interest for lending their money. This will mean higher borrowing costs for individuals and firms. And uncertainty about prices and the value of money might discourage firms from making long-term investments.

One of the main consequences of high inflation has been greater instability in economic conditions as a whole - periods when demand and output have been growing strongly but then fallen sharply. These ...

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This explains the importance of price stability