Why does the government have a low rate of inflation as a macroeconomic objective?

Asked on by melisa45i

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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The reason for this is that inflation can feed on itself, creating more and more inflation.  Uncontrolled inflation can destroy an economy.

If there is too much inflation, lenders will not want to lend money.  They will not know how much the currency will be worth by the time they get paid so they will prefer not to lend.  This will ruin the economy because no lending means that businesses can not get started, cannot expand, and may not even get the loans they need to operate on a day to day basis.  

In addition, no lending means no buying of big ticket items by consumers.  Consumers need to borrow to buy cars and houses in particular.   They also borrow through credit cards.  If there is no such lending, the economy grinds to a halt.

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