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Money Growth and Inflation - Essay Example

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Course: Date Due: Money Growth and Inflation Introduction Allan Meltzer, a great economist, made an observation that most staffs of Central Bank, majority of working economists as well as market practitioners hardly make use of money growth for prediction of inflation and that most of them rely on a theoretical relations or the Phillip’s Curve…
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Money Growth and Inflation
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Download file to see previous pages Several economists have repeatedly observed that continuous increase in prices of goods is directly attributed to the nominal quantity of money. This essay will major on the subject of money growth and inflation. For instance, it will analyze economic news reports like the News Release by the Bank of England (The Financial Express, 20) which sought to establish the role played by monetary policy regarding Inflation and Growth. Discussion Monetary inflation is an economic terminology that refers to sustained rise in the supply of money in an economy of any given country. It normally leads to price inflation, that is, general increase in price levels of products. Economists generally agree that there exists a causal relationship between the demand and supply of money, as well as prices of services and goods often quantified in monetary terms. However, there is no overall consensus pertaining the exact relationship and mechanism between monetary inflation and price inflation. There is a sophisticated system and various arguments put forward towards the issues that are involved, for instance how accurately determine monetary base, and or how other factors like money velocity impact the relationship and the most appropriate monetary policy. Review of previous literature shows that price levels and nominal money quantity variations are closely interwoven. Although the debate has been going on for long with substantial evidence being given, there still remains some dispute between the predicted link between inflation and money. One of the possible explanations given towards this is that the said relationship holds only over periods of time which are so long thus making the relationship uninformative for policymakers and practitioners, who concern themselves with inflation in the future, say like the next five months or a year («Business Report: U.S. hyperinflation? The markets know better.”23). However, the said relationship can not be overlooked because it has been backed with substantial evidence. Economists have to make monetary policies bearing in mind this consideration. Monetary policies have to play significant roles in enhancing economic growth and development in any economy. Spenser Dale, when addressing the Chinese Business Association and Asian Business Association of London Chamber of Commerce and industry, gave out his opinions regarding the monetary policy objectives. Particularly, Dale considered the monetary policy’s flexibility to support employment and growth and also control inflation. He also considered the possibilities of presently having scope for additional growth without creating extra price inflation. Spencer welcomed the present interest in such crucial issues, and noted that the financial crisis was partly associated with failure of the monetary policies. In many nations like the UK, monetary policies failed to activate the growth people longed to have. Some players have often asked if the UK’s regime that targets inflation does force the MPC to emphasize too much on inflation, instead of supporting growth recovery. In tackling this, Spenser noted that from its generation the core mission of MPC was to hit a target of 2% inflation, but in manner that it will support employment and growth. The MPS, he explained, has always done achieved that and brought recovery after the economic financial crisis aftermath. According to his report, Consumer ...Download file to see next pages Read More
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