The deepest question in macroeconomics is whether or not markets automatically bring about economic equilibrium. If the free play of market forces ultimately resulted in a level of full employment of national income with stable prices and economic growth, there would be no need for state intervention. The reality is that the government is interfering in its macroeconomic policies to achieve its policy objectives and restore the performance of the economy. The government's macroeconomic objective is to stabilize prices. We can look at this and imagine the government's desire to keep inflation low and stable. The reason is that there are many negative impacts associated with high levels of inflation, such as loss of purchasing power, to name the most important. But what happens in the event of deflation? Monetary policy and the concepts of inflation and deflation play a huge role in our economy as well as the lasting changes that take place with overall supply and demand. I would first like to discuss monetary policy and how it applies to inflation and deflation. Monetary policy is the regulation of the money supply and interest rates by a central bank, such as the U.S. Federal Reserve, in order to control inflation and stabilize the currency. Monetary policy is one of two ways that the government can impact the economy. By influencing the effective cost of money, the Federal Reserve can influence the amount of money spent by consumers and businesses (WebFinance, Inc, 2011). Wages and prices will begin to rise at faster rates if monetary policy stimulates aggregate demand enough to push labor and capital markets beyond their long-term capacities. The fact is that a currency... middle of paper... economics course is that, according to Isaac Newton, “every action has an equal and opposite reaction.” What would happen if the government did not intervene when necessary? Would everyone have lost their homes in the foreclosure boom? Would many more banks close without the bailouts and what chain reaction would follow? There are questions these people never want to hear and thanks to this course I understand our economy much better. Works Cited Hamilton, A. (2001, December 14). Inflation or deflation? Retrieved from http://www.zealllc.com/2001/infordef.htmWebFinance, Inc. (2011). Monetary policy. Retrieved from http://www.investorwords.com/3097/monetary_policy.html and http://www.investorwords.com/1487/disinflation.htmlWikipedia. (April 28, 2011). Inflation. Retrieved from http://en.wikipedia.org/wiki/Inflation