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Understanding Money and Banking - Essay Example

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This summarizes “A Cross of Rubber” by Paul Krugman for the purpose of identifying and explaining three terms or concepts from the article in the context of money or banking. Krugman in the article posits making unemployment problem permanent if the government regulators…
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Understanding Money and Banking

Download file to see previous pages... To use money requires cost and a person or business entity that needs and uses the same for the acquisition of good and services has to pay interest based on prevailing market rate. Another concept is the price of goods and services, expressed in currencies, which must be understood as the value of these goods and services when they are acquired in the market. Inflation rate is about rate of price increase as measured by price index and is usually measured yearly or monthly and erodes purchasing power of money (Eyler, 2009). It is important to know the same since the higher the inflation rate the higher would be the prices of goods and services and the harder for one who needs money to acquire the goods and services required for consumption or business purposes. High inflation rate would therefore normally be related to higher interest rate, which can be influenced or controlled by monetary authorities as way of arresting increase in prices or inflation for general welfare.
In the article, the bankers are demanding that the monetary authorities or the policy makers should allow interest rates to go up as former blames the low level of interest rates to be causing inflation or the continued increase in the prices of commodities. Krugman author has US economic slowdown or low economic recovery development in mind with high unemployment in the United States, which is a problem that must be addressed. He argues that increasing interest rate would mean accepting unemployment as permanent reality or accepting hardship without having in solution in the offing. To increase interest rate would be to discourage business borrowing from banks and tight monetary supply could in fact reduce inflation, which is also bad for the economy, but the greater evil of more unemployment would arise as consequence.
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