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


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INFLATION: CAUSES, EFFECTS AND THE FEDERAL RESERVE BOARD

OBJECTIVE

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

*****

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 rise in ***** gener*****l level of prices, as measured aga*****st some baseline ***** purchasing power." (Wikipedia, 2006) Furthermore inflation may be "regarded as a decline in the ***** power of money." (Ibid) Therefore, this ***** will *****ttempt to understand what causes the purchasing power ***** money to fall, ***** the effects are and what the Federal Reserve Board does to ***** inflation.

I. CAUSES OF INFLATION

According ***** the work entitled: "Understanding Inflation: So, What's To Worry About, Anyway? ***** 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. ((***** Inflation: So, What's ***** Worry About Anyway?, 2004) According ***** this ***** '***** Inflation' is: "...***** rate at which infl*****ionary causes would impact price levels if all inflationary causes were considered ***** the time gap eliminated." (Understanding Inflation: *****, What's To Worry About Anyway?, *****) Inflationary forces are stated to be ***** should be actually spoken of in relation to inflation. ***** forces are 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 ***** About Anyway, 2006) Some of these '***** forces' *****: (1) increase in imports unaccompanied by an ***** in exports; (2) Economic dependency and adverse credit shifts; ***** (3) a gener*****l liquidation ***** savings and reserve as*****s. (Ibid)

II. EFFECTS OF *****

The work of Boyd & Champ entitled: "Inflation, Banking and Economic Growth" states ***** effects of inflation. The first being that: "Several economists have found that countries with high inflation rates have inefficiently small banking sectors and 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 ***** inflation induces ********** to ration credit." (*****) A*****her effect of ***** as stated by Boyd and Champ is *****:."..inflation is negatively associated with real ***** market rates, real treasury bill rates, and real-***** deposit ********** that is an inflation increases ***** real rate of return on these instruments falls." (2006) Last, but not least ***** and ***** state that:."..most importantly, we find that inflation has a dramatic negative impact on the profitability of banks." (2006) Boyd and Champ additionally state *****: "***** world ***** seen a dramatic decline in inflation *****s 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 rates ***** inflation *****cause of the way

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