Understanding Money and Banking - Essay Example

RUNNING HEAD: Understanding Money and Banking Understanding Money and Banking of 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 or monetary authorities in the US and Europe allow interest rates level to increase. The three terms or concepts in the article that need to be explained are the following: Interest rate, and price and inflation.

Interest rate is important since it is a measure used in the economy to measure the cost of money or the price of every economic action for the acquisition of goods and services (Eyler, 2009). 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. Arguments used to justify increasing interest rate include the increasing commodity prices as evidence of inflation. The rising inflation which may have been caused by the emerging markets on the parts of the world, particularly China, which is a developing country.

Krugman argued the United States and Europe which are developed countries should be treated differently where recovery from the economy as evidenced by the economic growth could not be as high. Other causes of inflation like the bad weather experience in the former Soviet Union, which caused a fall in the world production, should be addressed differently as well (Krugman, 2011). Krugman maintains that American and European policy makers should not be influenced by the economic growths in the China economy which may have caused increasing prices or inflation.

To him, the American or European economy should not be made subservient with what Chinese economy’s interest. Krugman perceives US Federal Reserve Bank chairman’s position for keeping interest rate kept low but not from European Central Bank counterpart. Krugman favors solving unemployment by keeping interest rates low rather than be influenced by reported increasing price of commodities. To him, the economy must not be made of suffer because others’ economy need to be considered before the interest of the Americans and Europeans.

References:Eyler, R. (2009). Money and Banking: An International Text. Taylor & FrancisKrugman, P. (2011). A Cross of Rubber. New York Times. Retrieved 8 January 2011 from http://www.nytimes.com/2011/01/31/opinion/31krugman.html?_r=1&partner=rssnyt&emc=rss