Changes To The Economy Essay

580 words - 3 pages

Unexpected or unanticipated change is an alteration that catches people by surprise such that they have already made decisions that did not take the event into account. The economy is quite dynamic and numerous economic changes take place unpredictably. Economics endeavors to explain the manner in which people react and markets adjust to change. An unexpected 3 percent fall in the price level in the goods and services market will lead to similar effects as when the economy is experiencing deflationary shocks. People tend to increase their savings and cut down on their expenditure in anticipation of losing their sources of income. The stock market will also be characterized by tumultuous instability that will be an indicator of falling values of companies’ shares.
To prevent economic collapse, government will implement various policies including economic structural changes. This in turn influences investment decisions in the economy with investors targeting less risky and more conservative investment vehicles. This includes targeting tangible investments such as real estate or short-term investments that tend to maintain their values sustaining the consumer’s purchasing power. Unexpected prices decline implies that prices fall more than wages since wages are fixed by contracts. The cost of production rises since the firm is incurring more expenses than the revenue is generating from the same amount of raw materials and output. Consequently, firms will be forced to reduce their workforce increasing the unemployment level in the economy and lowering their production levels. As a result, the aggregate demand in the economy will suffer with decline in the demand for goods and services which in turn hurts the profit margins of enterprises. The economic uncertainty will also negatively affect the real price of...

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