02 Lecture 2.2 - Monetary Inflation Monetary Inflation is...

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Monetary Inflation Monetary Inflation is perceived as increasing prices for goods and services over relatively short periods of time. This means that the dollars you saved years ago will not buy what you expected to be able to buy today. Monetary inflation is a topic from macroeconomics and can be fairly complex to analyze and identify causes. It is generally known that inflation is caused by "excess money creation" or more dollars chasing the same stock of goods and services. In the United States, the Federal Reserve is the "lender of last resort" and the source of control of the money supply. The Federal Reserve exercises this control through the "discount rate" of interest on loans to commercial banks, and through purchases of U. S. Treasury securities. The details of the mechanisms are of interest to economists, but the underlying work of the Federal Reserve is to provide stable growth of the money supply consistent with the growth in economic activity. It is believed that this approach will lead to minimal inflation. If the money supply does not grow consistent with economic growth but stays static or declines, monetary deflation can result. Deflation is a period of generally falling prices and serious economic decline. The "Great Depression" of the 30's was an example of such a period where numerous bank failures were a source of money supply contraction which accelerated the decline in economic activity. The ability of the Federal Reserve to "control" inflation is not absolute; in fact, it is very difficult for the "Fed" to precisely "fine-tune" the money supply to the economy. Notably because forecasting the economy is very difficult and also that "monetary velocity" is known only after the fact. The rate of inflation varies from time to time and year to year depending on numerous macroeconomic factors. There is, of course, no steady inflation rate, but a fluctuating one. Consider, for example, the consumer price index (CPI) published by the U.S. government. It is the most widely used "market basket of goods and services" indicative of the U.S.
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