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 *****? (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 r*****e 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 purchas*****g 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 ***** Board does to control inflation.

I. CAUSES OF INFLATION

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

II. EFFECTS OF *****

The work of Boyd & Champ entitled: "Inflation, Banking and Economic Growth" states several effects of inflation. The ***** *****ing *****: "Several economists have found that countries with high inflation rates ***** inefficiently small banking sec*****rs ***** equity markets. This effect suggests that inflation reduces bank lending to the private sector, which is consistent ***** the view that a sufficiently high rate ***** ***** induces banks to ration *****." (*****) Ano*****r effect of inflation as stated ***** Boyd and Champ is that:."..***** is negatively associated with real money market rates, real treasury bill *****, and real-time deposit rates; ***** is an inflation increases the real rate of return on *****se instruments falls." (2006) Last, but not least ***** 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 *****: "***** world has seen a dramatic 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 rates of ***** because of ***** way

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