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government reserves, leading it into bankruptcy and finally causing a total economic shutdown. At this point the country could fall into utter disarray and it could take the economy and country decades to recover. If you think this could never happen, take a look at the year 1929 when the US, almost overnight, plunged from a seemingly prosperous economy into the claws of economic calamity. The decade that followed (known as the Great Depression era) perhaps was one of the most grueling times this nation has ever faced.

On the other side of the scale, an overheated economy, indicated by large upward GDP moves, could lead to equally severe repercussions. A fast moving economy sees a rapid rise in demand for products and services, causing prices to balloon. To keep up with higher demand, companies ramp up their purchase of raw materials (at higher prices) and add to their work force, depleting the pool of available workers. As unemployment reaches new lows, wage demand reaches new highs since employees now have the bargaining power. With more money available to them, people continue to buy more, driving the prices even higher: enter inflation.

For most of us the concept of inflation is formed by the stories told by our grandparents of how much they use to pay for some of the products we use today. We find it amusing to listen to them reminisce about the times when milk was 10 cents a gallon or bread went for 5 cents a loaf, but in reality these stories paint a clear picture of inflation. Simply stated, inflation is the rise in the prices of goods and services. In itself, a modest inflation over a long run is not only harmless but actually healthy for the economy. The nature of the economic world dictates that given time, prices will rise. Think of it this way, even though today we pay a much higher price for the same goods and services that our grandparents bought (e.g., milk, gas, housing, etc.), our quality of life may be better than that of the generations before us. …