Inflation is defined as a sustained increase in the general level of prices for
ID: 1163013 • Letter: I
Question
Inflation is defined as a sustained increase in the general level of prices for goods and services. You usually see it quoted as an annual percentage increase. One of the functions of money is that it is a store of value. Inflation hurts the value of the money you save. As inflation rises, every dollar you own buys a smaller percentage of a good or service. If increasing the money supply causes inflation in the long run, why does the Federal Reserve choose to do so? What are some way to avoid this lose of value while saving for retirement?
Explanation / Answer
. In this case Fed might be worried about the recession or fall in aggregate demand . Due to fall in aggregate demand investment stops, employment level falls in country thus in turn will affect productivity.
Moderate level of inflation is good for economy as it will generate economic growth . So once the target of reviving growth through expansionary monetary policy is finished FED will find ways to control inflation in economy. So one shouldn't do anything and just wait as inflation will be under control after few days.