Economic myths about money and inflation
Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Economic myths about money and inflation
The increase of money supply leads to more spending, higher employment , increased production, and a higher overall standart of living.
Myth І: increased money lead to economic prosperity
The reality: the increasing money via bank lending into new recreating resources leads to investment. these projects and investments are encouraged to be remotely removed before the final consumption.
Prices rise due to this unchanged preference, and these projects are liquidated, revealing the loss of capital.
As a result - production is lower and unemployment rises.
Lower entrance rates always are beneficial. There is a rule of the monetary authorities to drive down the entrance rates via open market operations
Myth ІІ : manipulating entrance rates leads to economic prosperity
The reality: the entrance rates are the product of the market. Historical rates could be low or high not being good or bad. It's not more than the fantasy by monetary authorities who believe that they can know the impact of the supply of money or domain for money.
Myth ІІІ: lowering the foreign exchange of the currency to give more local currency in exchange of foreign currency will lead to economic recovery.
The reality: no country can force another country to subsidised it economy by manipulating its exchange rate.
Giving more local currency subsidies the foreign buyers but it creates higher prices and exporters, employees, suppliers benefit from the transfer of wealth from later receivers of new money. The benefit for foreign buyers evaporates.
And it is too bad tor those who are with fixed incomes.
The reality: we cannot change the economic law in the monetary sphere. The relationship between the increase of money and the increase in the price level is not a mechanical one/more money leads to higher prices and vice versa. Money supply keeps increasing and the prices never become lower again
As a result money lose value
Myth ІV: money expansion will not cause the price rises
The reality: no regulatory enforcement can prevent money supply expansion. The monetary expansion encourages longer term projects where the cost of money is the main factor that gives forecasting success.
Myth V: more vigorously enforced regulations can prevent loan and investment loses.
The reality: the hyper inflation is caused by the loss of confidence in the money unit. When this happens - the domain by the public to hold the money falls to zero, prices become skyrocket and even if the monetary authorities freeze this the money supply, the panic will run its course. As the result the monetary authorities increase the payments to powerful domestic constituencies, such as retired, the military and public safety sector.
Myth VI : the government can prevent hyper inflation