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 the main effects of inflation? (3) How does the Federal Reserve Board control *****?

INTRODUCTION

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

I. ***** OF INFLATION

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

II. EFFECTS OF INFLATION

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

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