PEORIA MAGAZINE December 2022

ECON CORNER

market. These economic principles apply to aggregate supply and demand as well as in particular submarkets. A cycle of embedding reinforced price increases on the supply, or cost, side of markets can result in systemic inflation where markets for labor and other factors of production produce feedback effects … This can lead to self fulfilling expectations of continuing and perhaps rising rates of inflation. The policies mentioned all have direct impacts on aggregate demand but are also targeted at attempting to mitigate the impact of inflation on individual and household budgets, clearly a different objective from the battle against the underlying causes of inflation. Reducing federal spending and lowering taxes would move aggregate demand in opposite directions while having differential distributive effects. In fact, we know that reducing federal government spending to allow an equal, offsetting reduction in taxes would have a small contractionary effect on aggregate demand. But … those directly impacted by the expenditure cuts are unlikely to be the same parties seeing their tax burdens reduced.

government spending, lowering taxes, making cuts in the social safety net (Medicare, Social Security, etc.) – how would those moves likely affect inflation specifically? What are some other potential tradeoffs, both good and bad, of those policy measures? Dr. Cleeton (DC): It is undeniable that the litany of policy proposalsmentioned will have direct and indirect effects on the inflationary environment. It is useful to ask: What is the objective? Inflation is a measure of the rate of increase in a general price level usually expressed intermsof theConsumerPrice Index. Price changes serve an important allocative role, efficiently distributing goods and services to their highest valued use. This is true of both price increases and decreases as suppliers respond and assign more resources towardmorevaluableproductionor away from less valuable endeavors. Supply and demand changes produce these price signals and either an increase in demand or a decrease in supply will both induce upward price adjustments. However, they have opposite effects in terms of the equilibrium quantity exchanged in the

An Interview with Dr. David Cleeton, chairman of the Department of Economics at Illinois State University INTERVIEW BY MIKE BAILEY W e l come t o Peor i a Magazine’s Econ Corner, a recurring feature in which we pose questions to experts about various economic issues and how they affect our lives and careers here in central Illinois. Our guest for December is Dr. David Cleeton, chairman of the Department of Economics at Illinois State University. Peoria Magazine (PM): With a general election hovering over the nation’s economy, it was inevitable that the current inf lationary period would be politicized. Without wading into partisan politics and addressing instead the differing policy proposals – some examples would be reducing federal

86 DECEMBER 2022 PEORIA MAGAZINE