Murojah
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Explain theories of inflation.
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maachu_pichuu
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More money chasing too few goods creates inflation.
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Murojah
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(Original post by maachu_pichuu)
More money chasing too few goods creates inflation.
Thanks,,,,,, An increase in money demand cause inflation by the classical theorists
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maachu_pichuu
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(Original post by Murojah)
Thanks,,,,,, An increase in money demand cause inflation by the classical theorists
This is why a central bank is very important as they control the flow of new money into the economy. If you keep printing money, you cause inflation as cash devalues. Then you need to raise interest rates and/or start selling bonds on the open market to take money out of the system.
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Murojah
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(Original post by maachu_pichuu)
This is why a central bank is very important as they control the flow of new money into the economy. If you keep printing money, you cause inflation as cash devalues. Then you need to raise interest rates and/or start selling bonds on the open market to take money out of the system.
What if the country is using those those bonds as currency ?
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maachu_pichuu
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(Original post by Murojah)
What if the country is using those those bonds as currency ?
Bonds are debt to either a company or government, you can trade bonds on the open market, but you can't use them as legal tender for goods (though personally I would be happy to take a bond). Bonds are affected by supply and demand like most things, the price for bonds drop as the risk-free rate by the central bank rises.
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Murojah
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(Original post by maachu_pichuu)
Bonds are debt to either a company or government, you can trade bonds on the open market, but you can't use them as legal tender for goods (though personally I would be happy to take a bond). Bonds are affected by supply and demand like most things, the price for bonds drop as the risk-free rate by the central bank rises.
I have an example of a country using Bonds as a medium of exchange. In fact they are being used as local domestic currency and not international. So the effects to inflation are the same or not?
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maachu_pichuu
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(Original post by Murojah)
I have an example of a country using Bonds as a medium of exchange. In fact they are being used as local domestic currency and not international. So the effects to inflation are the same or not?
Inflation increases if money supply increases relative to the goods and services a country produces. The general public does not use bonds to buy goods, bonds are traded in financial markets as a debt instrument. The bond is a cashflow of income, which if the bond doesn't default will be paid. The cashflow becomes more valuable depending on the rate of return on a risk-free asset such as a bank account and the earnings of stocks. If stocks earn a lot, no one will want a bond. The cashflows of stocks are not known, but the cashflows of bonds are known.
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Murojah
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(Original post by maachu_pichuu)
Inflation increases if money supply increases relative to the goods and services a country produces. The general public does not use bonds to buy goods, bonds are traded in financial markets as a debt instrument. The bond is a cashflow of income, which if the bond doesn't default will be paid. The cashflow becomes more valuable depending on the rate of return on a risk-free asset such as a bank account and the earnings of stocks. If stocks earn a lot, no one will want a bond. The cashflows of stocks are not known, but the cashflows of bonds are known.
I understand now thank you,,, so it means selling of bonds by the government to the majority can lead to reduced money supply therefire reduced inflation?
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maachu_pichuu
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(Original post by Murojah)
I understand now thank you,,, so it means selling of bonds by the government to the majority can lead to reduced money supply therefire reduced inflation?
Yes, anything that pulls money out of the system. The easiest way is to raise interest rates, so borrowing money becomes harder.
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Murojah
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(Original post by maachu_pichuu)
Yes, anything that pulls money out of the system. The easiest way is to raise interest rates, so borrowing money becomes harder.
So by increasing interest rates it will become difficult to borrow ok? If yes then an increase in interest rates can cause crowding out effect. Or the other way round it increases investment there for increasing Aggregate demand n may result to high prices
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maachu_pichuu
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(Original post by Murojah)
So by increasing interest rates it will become difficult to borrow ok? If yes then an increase in interest rates can cause crowding out effect. Or the other way round it increases investment there for increasing Aggregate demand n may result to high prices
Yes it becomes harder to borrow as people can't afford to make those higher payments.
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