The goal to have a stable economy is to avoid high rates of inflation or deflation. High Rates of inflation/deflation can discourage business activity. Price stability adds a degree of certainty to the future for businesses and consumers alike.
- During the 1920s, or the "Roaring 20s", there was an economic boost. People were buying many things and it was just a really great time for the economy. As you can see in the chart the economy was relatively stable during that time because people were spending their money. The money spent went back to businesses and therefore, many jobs were available. There were many technological advancements which strengthened the economy as well. This decade, however, "roared" of the agony of prolonged depression.
- In the early 1930s, more than 15 million Americans were unemployed. The stock market crashed on October 29, 1929. Some economists think it was because of the uneven distribution of wealth and purchasing power in the 20s. The nation was unprepared for the crash and the banks were unregulated and uninsured. The government offered no insurance for the unemployed so when people stopped earning, they stopped spending. This is what led to the drop in the graph. Since prices had to go up and more people were unemployed, there was less spending and therefore, less economic growth.
Our conclusion on price stability is that an economy will be stronger with it. Yes, the 1920s was a great time of economic growth and stability but because of all the wealth and unnecessary spending it crashed in the 30s. Since people were only used to having what they want when they wanted it, they didn't know what to do when they were unemployed. This is why the Great Depression happened because the economy couldn't quickly bounce back from inflation and the high unemployment rate. The graph we used shows the importance of having price stability.