Essay - Inflation: Causes, Effects and the Federal Reserve Board Objective the...


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INFLATION: CAUSES, EFFECTS AND THE FEDERAL RESERVE BOARD

OBJECTIVE

The objective of this work is to answer the questions *****: (1) What causes inflation? (2) What are ***** main effects of inflation? (3) How does the Federal Reserve Board control *****?

*****

The first step in answering the questions set out in this research is to understand precisely what inflation actually is. Inflation can be described as "a r*****e in ***** gener*****l level of prices, as me*****ured against some baseline ***** purchasing power." (Wikipedia, 2006) Furthermore ***** may be "regarded as a decline in the ***** power of money." (Ibid) Therefore, this ***** will attempt ***** understand what causes the purchasing power ***** money to fall, what ***** effects are and what the Federal ***** Board does to control inflation.

I. ***** OF INFLATION

According ***** the work entitled: "Understanding Inflation: So, *****'s To Worry About, Anyway? inflation is not just concerned with monetary purchasing ***** and in fact there ***** several aspects to *****flation as follows: (1) Monetary inflation; (2) Price ***** and (3) Real inflation. ((Understanding Inflation: *****, What's ***** Worry About Anyway?, 2004) According ***** this work 'Real Inflation' is: "...the rate at which inflationary causes would impact price levels if all ***** causes were considered and the time gap eliminated." (***** Inflation: So, What's To Worry ***** Anyway?, 2004) *****ary forces are stated to be ***** should be actually spoken of in relation ***** inflation. Inflationary forces ***** stated to include: "all forces that increase demand without relationship ***** supply, or ***** decrease ***** without any relationship to demand." (Understanding Inflation: So, ***** To ***** About Anyway, 2006) Some of these 'inflationary forces' are: (*****) increase in imports unaccompanied by an ***** in exports; (2) Economic dependency and adverse credit shifts; and (3) a general liquidation ***** savings and reserve as*****s. (*****)

II. EFFECTS OF INFLATION

The work of Boyd & Champ entitled: "Inflation, Banking and ***** Growth" states several effects of inflation. The first being that: "Several economists have found that countries with high inflation rates ***** inefficiently sm***** banking sec*****rs ***** equity markets. This effect suggests that inflation reduces bank lending to the private sec*****r, which is consistent with the view that a sufficiently high rate of inflation induces banks to ration credit." (*****) A*****her effect of inflation as stated by Boyd and Champ is that:."..inflation is negatively associated with real money market *****s, real treasury bill rates, and real-time deposit *****; that is an inflation increases ***** real rate of return on these instruments *****s." (2006) Last, but not least ***** and Champ state that:."..most importantly, we find that ***** has a dramatic negative impact on the profitability of *****." (2006) Boyd and Champ additionally state *****: "***** world ***** seen a ***** decline in inflation rates in recent decades, but concerns about inflation may still be warranted, especially in some countries. Evidence ***** mounting that inflation is harmful to economic activity even at fairly modest ***** ***** inflation because of ***** way

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