Economic Ideas

CPI Concerns

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  1. Anonymous says:

    According to “New Ideas from Dead Economists”, “wealth is measured by the goods and services it can buy, not by numerals.” If $1987.70 in 2010 can purchase the same amount of goods and services that $1000 could in 1986, then more money today is worth the same as less money back then. This rise in the inflation rate, which would also lead to a rise in prices, could be controlled by the Fed. According to monetary policy, the Fed can put the “brakes” on the economy by selling bonds to the public in order to contract the money supply. The new owners of the bonds would pay the Fed for these bonds, and the money that the Fed now owns is no longer considered part of the money supply. The Fed can also control the amount of loans that banks make, and if the Fed tells banks to make fewer loans, the money supply will shrink. Lastly, the Fed can also raise the interest rate on the loans they make to banks, which discourages the banks from making their own loans. This also lowers the money supply. Less money supply means lower prices and lower inflation.

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