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

INTRODUCTION

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

I. ***** 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 ***** and (3) Real inflation. ((Understanding Inflation: *****, What's To Worry ***** Anyway?, 2004) According ***** ***** work '***** Inflation' is: "...***** rate at which inflationary causes would impact price levels if all ***** causes were considered and the time gap eliminated." (***** Inflation: So, What's ***** Worry About Anyway?, *****) Inflationary forces are stated to be what should be actually spoken of in relation ***** inflation. ***** forces ***** stated to include: "all forces that increase dem***** without relationship ***** supply, or that decrease ***** without any relationship to *****and." (Understanding Inflation: So, ***** 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 shifts; and (3) a general liquidation ***** savings and reserve assets. (Ibid)

II. EFFECTS OF INFLATION

The work of Boyd & Champ entitled: "Inflation, Banking and ***** Growth" states several effects of inflation. The first *****ing *****: "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 with the view that a sufficiently high rate of inflation induces ********** to ration credit." (2006) A*****her effect of ***** as stated by Boyd and ***** is that:."..inflation is negatively associated with real ***** market rates, real treasury bill rates, and real-time deposit rates; that is an inflation *****s the real rate of return on these instruments **********." (2006) Last, but not least ***** and Champ state that:."..most importantly, we find that inflation has a dramatic negative impact on the profitability of banks." (2006) Boyd and ***** additionally state that: "***** world has seen a dramatic decline in *****flation *****s in recent decades, but concerns about inflation may still be warranted, especially in some countries. Evidence is mounting ***** inflation is harmful to economic activity even at fairly modest rates ***** inflation *****cause of ***** way

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