Inflation Amateur Term Paper

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Date Submitted: 07/09/2011 06:54 PM

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“Monetary policy is most effective in the presence of a

firmly established nominal anchor, and the more

understandable is the anchor to the public, the better.”

-Inflation Targeting: Lessons from the International Experience

Part I

Introduction

(Definition and Importance)

Money could be anything as long as it can be exchanged for goods or services. Changes in the forms of money is evident in history – from the method of barter, to the use of gold and silver, metals, salt, pepper, stones, shells, feathers and tea, money has evolved and now falls in two categories – coin and paper money.

Today, money has different types, appearances, values and material, fit for our daily usages. Money is the main character in trade and industry. The status of an economic entity can be measured with money as the basis.

Inflation is a common word at present. It is one of the indicators of how well a country is doing financially. The word inflation comes from the Latin word inflationem which means to blow up or increase in size. It was first used in a monetary sense in 1838.

Inflation is the increase of the prices of goods and services offered in an economy in a period of time. This increase may be very small or very large. It may also mean an increase in the values and prices of financial assets such as stocks, bonds or real estate. When there is inflation, purchasing power falls because there is a decrease in the value of money. Inflation is usually measured by the Consumer Price Index (CPI) or the Producer Price Index (PPI).

Other economic concepts related to inflation are deflation- a fall in general price level, hyperinflation- uncontrolled inflationary fluctuation, stagflation- the combination of inflation, slow economic growth and high unemployment, and reflation- an attempt to raise the price level.

When there is inflation, people cannot buy as much with their money. The living standards fall. The wage increase that people would demand...