Concept of Inflation

Topics: Inflation, Monetary policy, Federal Reserve System Pages: 4 (1658 words) Published: February 15, 2011
Inflation, a short explanation
In the world of finance phrases like mortgage backed security, prime rate, speculation and inflation get thrown around a lot yet most people don’t have a clue what it all means. After more than three centuries of evolution even the most knowledgeable can’t wrap their head around the many ways the U.S. economy works and why it sometimes doesn’t. In the next few pages I hope to explain only one of these very complicated concepts, that of inflation.

Inflation, in economic terms, is the general rise in prices of goods and services over time, as well as the loss of value of each dollar or monetary unit (Inflation). The measure of inflation is called the Inflation Rate which is measured on an annual basis. Effects of inflation on the economy are considered both good and bad. On one hand controlled inflation must occur for economic growth to be sustained, more money means more business. On the other hand, unchecked inflation can lead to deceased monetary value leading to the rise in prices. This can discourage future investment due to uncertainty in future markets. By controlling interest rates, as well as the monetary supply central banks can combat these negative effects. In the United States the Federal Reserve is charged with this duty.

The Federal Reserve established by the Federal Reserve act of 1913,is whats known as a central bank . here in America the federal reserve is the body that decides if and when to make more money. It is comprised of twelve banks, as well as the Board of Governors who are appointed by the president and confirmed by congress. Although the Reserve is used as a tool of the government it is not a government agency. To control inflation The Federal Reserve has the authority to set reserve requirements (the amount of money banks must have on hand) and control the money supply. The ability to make more money gives the federal reserve the power to control the “Prime Rate” which is the intrest rate the feeral...
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