Inflation

 People are scared of the word inflation. But inflation is one of the easiest ways to help the economy even though it might not be the best solution. Credit shocks are the reasons that recoveries after crises are slow.

Banks stop making loans in order to heal. Consumers use extra cash to pay down debts. And governments end up in a gridlock, because no one knows who to blame. But two very educated professors, one from the University of Wisconsin-Madison and the other from Harvard, think that the solution is higher prices.

There are some benefits to inflation. Inflation would shrink the value of the debts both the government and borrowers have to pay. Higher salaries would also make it easier for borrowers to pay back their loans helping banks. Inflation pushes people and companies to spend money. Also, increasing inflation could stimulate the economy, as well as lower our debts.

1. Why is it bad for the economy for consumers to save or pay down debts?

 the value of the dollar is decreasing and people use the little extra cash that they have to pay down debts

2. How would inflation help people pay off debts?

 inflation would shrink the value of debts

3. How can inflation stimulate spending?

 If you know prices are going to drop or stay flat, then you will delay a purchase. likewise, if you know prices are going to rise, then you will spend your money now.

4. The author argues the Fed should allow inflation to increase, how can they do this?

 higher gas prices and raise the inflation target to 6%

5. Why does the former Fed Chairman warn against using inflation as a tool to help the economy?

 the benefits of inflation last temporarily but the effects of higher prices last a long time

6. What alternative does he suggest? What would that end up causing?

institute a delayed consumption tax, prices would go up

7. What would be a positive impact of a national sales tax?

 it could boost demand in the same way as inflation

8. What would be a negative impact of a national sales tax?

 the fear of it would make things more expensive

9. What does the author mean when he says "It's something the Fed could do on its own, and get done now"?

 the job of the Fed is to regulate the money in circulation, so they can just increase the money in circulation themselves as early as tomorrow