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INFLATION: CAUSES, EFFECTS AND THE FEDERAL RESERVE BOARD

OBJECTIVE

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

*****

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

I. CAUSES OF INFLATION

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

II. EFFECTS OF INFLATION

The ***** of Boyd & Champ entitled: "Inflation, Banking and ***** Growth" states ***** effects of inflation. The first ********** *****: "Several economists have found that countries with high inflation rates have inefficiently sm***** banking sec*****rs and equity markets. This effect suggests ***** inflation reduces bank lending to the private sector, which is consistent ***** the view that a sufficiently high rate of ***** induces ********** to ration *****." (2006) A*****her effect of inflation as stated ***** Boyd and ***** is that:."..inflation is negatively associated with real ***** market *****s, real treasury bill rates, and real-***** deposit rates; that is an inflation *****s the real rate of return on *****se instruments **********." (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) Boyd and Champ additionally state that: "The world has seen a dramatic decline in *****flation rates in recent decades, but concerns about inflation ***** still be warranted, especially in some countries. Evidence ***** mounting that inflation is harmful to economic activity even at fairly modest rates ***** ***** *****cause of the way

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