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

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


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


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


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


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