In a purely economic sense, inflation refers to a general increase in price levels due to an increase in the quantity of money; the growth of the money stock increases faster than the level of productivity in the economy. The exact nature of price increases is the subject of much economic debate, but the word inflation&nbs𝓡p;narrowly refers to a monetary phenomenon in this context.

Using these specific parameters, the word 澳洲幸运5官方开奖结果体彩网:deflation is used to describe productivity increasing faster than the money stock. This leads to a general decrease in prices and the cost of living, which many economists paradoxically interpret to be harmful. The arguments against deflation trace back to John Maynard Keynes’ 澳洲幸运5官方开奖结果体彩网:paradox of thrift. Due to this belief, most central banks pursue a slightly inflationary monetary policy to safeguard against defla꧑tion.

Inflation Targeting

Most modern 澳洲幸运5官方开奖结果体彩网:central banks target the rate of inflation in a country as their primary metric for monetary policy. If prices rise faster than their target, central banks tighten 澳洲幸运5官方开奖结果体彩网:monetary policy by increasing interest rates or other hawkish policies. Higher interest rates🐠 make borrowing more expensive, curtailing both consumption and investment, both of which rely heavily on credit.

Likewise, if inflation falls and economic output declines, the central bank will lower interest rates and make borrowing cheaper, along with several other possible 澳洲幸运5官方开奖结果体彩网:expansionary policy tools.

As a strategy, 澳洲幸运5官方开奖结果体彩网:inflation targeting views the primary goal of the central bank as maintaining price stability. All of the tools of monetary policy that a central bank has, including 澳洲幸运5官方开奖结果体彩网:open market operations and 澳洲幸运5官方开奖结果体彩网:discount lending, can be employed in a general strategy of inflation targeting. Inflation targeting can be contrasted with strategies of central banks aimed at other measures of economic performance as their primary goals, such as targeting 澳洲幸运5官方开奖结果体彩网:currency exchange rates, the 澳洲幸运5官方开奖结果体彩网:unemployment rate, or the rate of 澳洲幸运5官方开奖结果体彩网:nominal grosಞs domestic product (GDP) growth.

How Central Banks Influence the Money Supply

Contemporary governments and central banks rarely ever print and distribute physical money to 澳洲幸运5官方开奖结果体彩网:influence the money supply, instead relying on other controls such as interest rates for interbank lending. There ar♓e several reasons for this, but the two largest are:

1. New financial instruments, electronic account balances, and other changes in the way individuals hold money make basic monetary controls less predictable.
2. History has produced more than a handful of money-printing disasters that have led to 澳洲幸运5官方开奖结果体彩网:hyperinflation and mass 澳洲幸运5官方开奖结果体彩网:recession.

The U.S. Federal Reserve switched from controlling actual 澳洲幸运5官方开奖结果体彩网:monetary aggregates, or the number of bills in circulation, to implementing changes in key 🌌interest rates, which has sometimes been called the “price of money.” Interest rate adjustments imp🍷act the levels of borrowing, saving, and spending in an economy.

When interest rates rise, for example, savers can earn more on their demand deposit accounts and are more likely to delay present consumption for future consumption. Conversely, it is more expensive to borrow money, which discourages lending. Since lending in a modern 澳洲幸运5官方开奖结果体彩网:fractional reserve banking system actually creates “new” money, discouraging lend💫ing slows the rate of monetary growth and inflation. The opposite is true if interest rates are lowered; saving is less attractive, borrowing is cheaper, and spending is likely to increase, etc.

Increasing and Decreasing Demand

In short, central banks manipulate interest rates to either increase or decrease the present demand for goods and services, the levels of economic productivity, the impact of the banking money 澳洲幸运5官方开奖结果体彩网:multiplier, and inflation. However, many of the impacts of monetary policy are delayed anꦡd difficult to evaluate. Additionally, e🍬conomic participants are becoming increasingly sensitive to monetary policy signals and their expectations about the future.

There are some ways in which the 澳洲幸运5官方开奖结果体彩网:Federal Reserve controls the money stock; it participates in what is called open market operations, by which federal banks purchase and sell 澳洲幸运5官方开奖结果体彩网:government bonds. Buying bonds injects new dollars into the economy, while selling bonds drains dollars out of circulation. So-called 澳洲幸运5官方开奖结果体彩网:quantitative easing (QE) measures are extensions of these operations. Additionally, the Fed can change the 澳洲幸运5官方开奖结果体彩网:reserve requirements at other banks, limiti🥀ng or expanding the impact of mo⛄ney multipliers.

The Bottom Line

Arguments for monetary policy are that it controls inflation through a target interest rate; is quick and easy to implement; can be undertaken by independent and politically neutral central banks without fear of political repercussions; and can actually boost exports if the nation’s currency is weaker on world markets.

Arguments against monetary policy are that it takes months or even years to have effects on an economy; can lead to a 澳洲幸运5官方开奖结果体彩网:liquidity trap when interest rates are kept very low for prolonged periods of time; affects an entire economy or country when only some sectors or regions might need the stimulus; and creates a risk of hyperinflation.

Economists continue to 澳洲幸运5官方开奖结果体彩网:de𓄧bate the usefulness of monetary policy, but ꩵit remains the most direct tool of central banks t𒈔o combat or create inflation.