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 rise in ***** general level of prices, as me*****ured against some baseline of purchasing power." (Wikipedia, 2006) Furthermore inflation may be "regarded as a decline in the purch*****s*****g power of money." (Ibid) Therefore, this ***** will attempt to understand what causes the purchasing power ***** money to fall, what the ***** are and what ***** Federal ***** Board does to control inflation.

I. CAUSES OF INFLATION

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

II. EFFECTS OF INFLATION

The work of Boyd & Champ entitled: "Inflation, Banking and Economic Growth" states ***** effects of inflation. The first ********** that: "Several economists have found that countries with high inflation rates ***** inefficiently small banking sec*****rs ***** equity markets. This effect suggests ***** ***** reduces bank lending to the private sec*****r, which is consistent ***** the view that a sufficiently high rate of inflation induces *****s to ration *****." (*****) A*****her effect of ***** as stated ***** ***** and ***** is *****:."..inflation is negatively associated with real ***** market *****s, real treasury bill rates, and real-time deposit rates; that is an inflation *****s ***** real rate of return on these instruments *****s." (2006) Last, but not least Boyd and Champ state that:."..most importantly, we find that ***** has a dramatic negative impact on the profitability of banks." (2006) ***** and Champ additionally state *****: "The world ***** seen a dramatic decline in *****flation 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 rates ***** ***** *****cause of ***** way

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