Amika, a poor citizen of Zimbabwe goes to a local store with more than twenty billion Zimbabwean dollars in hand. Instead of being afraid of getting mugged, she is rather worried if she can buy a loaf of bread with the money she has. The day before she could buy 20 loafs of bread for 10 million dollars, but today she would feel lucky to get a loaf of bread even though she has much more money than she had yesterday. This sounds crazy, but it is the fact. “The actual news from CNN.com was that the Zimbabwe dollar is now so worthless that "Zimbabwe’s central bank will introduce a $50 billion note", which is, as you probably surmised, a new record” (Mogambo). Isn't it outrageous? Yes! It is. This happens when governments print more and more money without considering the consequences of their action. Zimbabwe is just an example. There are significant numbers of countries facing the same problem; they might not be as bad off as Zimbabwe, but still this is a serious matter. So the question is what caused the money to lose its value so dramatically, and also what are the major consequences? The answer is fairly simple. Uncontrolled printing of money having no ties to limited commodities of generally accepted value such as gold or silver, and the increasing demands for goods that are limited have led currencies to lose their value significantly. This has caused the major problem of inflation.
This problem of inflation has spread rapidly in many countries in recent decades. Venezuela, Argentina and Pakistan are well known examples. It is clear that the main reason behind this problem of inflation is the inability of so called “fiat” currency ( a currency that a government has declared to be legal tender, despite the fact that it has no in...
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This paper argues that the Mexican peso crisis of December 20 should have been expected and foreseeable. In the year preceding the crisis, there were several indicators suggesting that the Mexican economy and peso were already under extreme pressure. The economy bubble was ballooning to burst so much so that it was simply a crisis waiting to happen.
Economically speaking, Argentina was at the verge of collapse despite its initial strong stability seen at the beginning of Videla’s regime. Argentina adapted a neo-liberal economic system; in addition their initial policies of liberating trade and eliminating price controls were just some policies that would create huge economic problems for Argentina at the time. In order to make up for liberating domestic trade and eliminating price controls control had to be implemented to ensure that the regime had full control of the economic situation which was at stake as a result of the adoption of these polices. Wages in Argentina were lowered which resulted in “real wage well below historical levels” (Nogues). Although this was successful in reducing inflation at first this in time also cause inflation to rise relatively high. As a result of this high inflation that occurred as a result of this police, he Argentinian regime entered a panic and implemented other policies to try to amend this problem, policies that resulted contradictory since these polices hindered the success of one another. The reintroduction of price and exchange controls along with the already implemented wage controls all lead up to “inconsistent policy behavior” (Nogues).The inconsistencies in economic policies lead the Central Bank to classify “perceived capital inflows as being inflationary, and financial controls to be ineffective” (Nogues).
Just like a public company [that issues too much stock] can be punished by the public markets for diluting its share structure, a nation’s currency can suffer the same effects through inflation if the government prints too much money relative to the value of the economy. This can be co...
Friedman, Milton and Jacobson Schwartz, Anna. A Monetary History of the United States, 1867-1960. Princeton, 1963
Empirical literature examining the determinants of inflation has mostly viewed it as a monetary phenomenon. This viewpoint basically stems from Milton Friedman’s famous dictum that inflation is always and everywhere a monetary phenomenon. However, the conjecture of Friedman has recently come under attack. In fact, there appears to be virtually no correlation between money growth and inflation since the early 1980s. This leads to evolution of the argument known as Fiscal Theory of Price Level (FTPL). To capture the nonmonetary aspects of inflation, a number of economists investigate the main political, institutional and economic determinants of inflation across countries and over time. For instance, Aisen and Veiga (2006) conclude that political instability leads to higher inflation. Their study reveals that an additional government crises and a cabinet change which are used as proxy for measuring political instability raise inflation rate by 16.1% and 9.1% respectively. In another study, Aisen and Veiga (2008) extend their work to further analyze the effect of political instability, social polarization and the quality of institutions on inflation volatility. They argue that politically unstable and socially polarized countries with weak institutions are more exposed to political shocks that result in discontinuous monetary and fiscal policies which in turn result in higher inflation volatility. The intuition is that rising inflation instability creates frictions on market which reduces economic efficiency and causes the prevailing price in the economy to deviate from the price which would otherwise have been determined in presence of stable price level. They also provide evidence that greater independence of the Central Bank leads...
The purpose of this is to draw attention to the invisible government which controls the United States. One of the means of control is the Federal Reserve System. Many of us have seen the recent decline of the dollar in the news. We will address this in terms of the Federal Reserve System’s control over the value of the dollar. Much of this is a concentration of quotes by noteworthy individuals such as Economists, Presidents, and Congressmen.
Hepburn, A. Barton. A History of Currency in the United States. New York: August M. Kelley Publishers, 1915.
"Real News/Wilpert Part 2: Why is Inflation So High in Venezuela?." Venezuela News, Views, and Analysis. N.p., n.d. Web. 26 May 2014. .
Even before the creation of the Federal Reserve, banks were used by the public just as we use them today. Deposits were made into savings accounts. Loans were taken out to mortgage a home or finance a new business. Banknotes were issued and spent when the public borrowed from the banks. Borrowers spent these banknotes just as paper money is spent today. These bank notes were valued as money since they were backed by the promise that they would be exchanged on demand for either gold or silver.
The quantity theory of money holds that changes in the general level of prices are directly proportional to changes in the quantity of money. It is obvious though, that merely an increase in the supply would have no effect on prices. The increase must be spent in order for this to happen. This is where velocity of circulation (V) becomes important. If the total amount of all transactions is T, and the total amount of money is...
Money Supply plays an important role in macroeconomic analysis, especially in selecting an appropriate monetary and fiscal policy. Considerably, I am yet to come across theoretical work that has been done on this topic (analysis money supply and its impact on other variable i.e. inflation, interest rate, real GDP and nominal GDP). However some other topics similar to this one have been done by AL-SHARKAS, Adel, where he uses the same technique and models on the topic ‘out put response to shocks to interest rate, inflation and stock returns. His work investigates the relationship between the Jordanian output and other macroeconomics variables such as inflation, interest rate and stock returns. His paper employs the VAR approach method of Lee (1992) to analyze the relation and dynamic interaction among variables. The IRF and the FEVD from the VAR model are computed in order to investigate interrelationships within the system. The empirical results indicate that Interest rate and inflation are weakly negatively correlated and real stock returns and inflation is very weakly positively correlated for all leads and lags are negatively associated. Furthermore, the response of output (IPG) to shocks in stock returns (R1) is strongly positive up to the first 6 periods and after which the effect almost dies. This indicates that the relationship between stocks returns (R1) and real activity (IPG) is positive and inflation has a negative impact on IPG (Adel A. Al-Sharkas 2004).
According to Wright & Quadrini, (2009), the money supply is determined by interactions between four economic forces: depository institutions, depositors, borrowers and central banks. Central banks manipulate money supply in the economy by controlling its money liability called the monetary base (MB). MB, in fact, equals to the total currency in circulation (C) plus Reserves (R) which are cash in banks’ vaults and commercial banks’ deposits with the Fed. When the Fed engaged in Open Market Operation (OMO), they are controlling the MB by selling and buying any securities but in most cases, Fed prefers government bonds over other assets. If the Fed wants to increase MB, it buys securities from the banks or other primary dealers. For instance,
Inflation; ‘a situation in which prices rise in order to keep up with increased production costs… result[ing] [in] the purchasing power of money fall[ing]’ (Collin:101) is quickly becoming a problem for the government of the United Kingdom in these post-recession years. The economic recovery, essential to the wellbeing of the British economy, may be in jeopardy as inflation continues to rise, reducing the purchasing power of the public. This, in turn, reduces demand for goods and services, and could potentially plummet the UK back into recession. This essay discusses the causes of inflation, policy options available to the UK government and the Bank of England (the central bank of the UK responsible for monetary policy), and the effects they may potentially have on the UK recovery.
Inflation is one of the most important economic issues in the world. It can be defined as the price of goods and services rising over monthly or yearly. Inflation leads to a decline in the value of money, it means that we cannot buy something at a price that same as before. This situation will increase our cost of living.
Daily in the USA about 38 million banknotes of various face value for total amount about 541 million dollars are issued (Facts about USA money).Dollars involve deep consequences both for the USA, and for other countries. Increase of its course relatively reduces the volume of export revenue in dollars, quite often involves more considerable, than change of an exchange rate, falling of the world prices, especially on raw materials. On the contrary, decrease in a dollar rate serves as the powerful tool promoting growth of the American export and a pushing off of competitors of the USA in foreign markets. At the same time import to the USA owing to effect of a rise in prices restrains. Thus, for the USA changes in the exchange rate of dollar anyway bring benefits and advantages.Reduction of leading positions of the USA in world economy is assisted by the international role of dollar which remains the main reserve and settlement means in world monetary system. Foreign currency reserves of the central banks of other countries for 61% consist of dollars, nearly 2/3 calculations in world trade are carried out in dollars; the dollar serves as a measure of value of many important goods (for example: oil) in the world market; in dollars 3/4 international bank crediting is made (Aleksandr Popov). Changes in the exchange rate of dollar involve deep consequences both for the USA, and for other countries. Increase of its course relatively reduces the volume of export revenue in dollars, quite often involves more considerable, than change of an exchange rate, falling of the world prices, especially on raw materials. On the contrary, decrease in a dollar rate serves as the powerful tool promoting growth of the American export and a pushing off...