பேச்சு:பணவீக்கம் - தமிழ் விக்கிபீடியா (Tamil Wikipedia)

# பேச்சு:பணவீக்கம்

### கட்டற்ற கலைக்களஞ்சியமான விக்கிபீடியாவில் இருந்து.

இதன் சிறுபகுதியாவது தமிழாக்கம் செய்யப்படுவது பொருத்தமானது.

The two most obvious versions of this, each held by some economists to be "real" inflation, are for prices of goods and services in the currency in question to rise, or for the money supply to increase.

Price inflation is closely akin to "cost of living" measurement, where a "basket" of goods is used as a standard and the prices of the goods are compared at two intervals and adjusting for changes in the intrinsic basket. But, technically, this is not raw inflation; it is an attempt to determine real-life value of money compared to the members of the society in question, adding other factors like increased expectations.

Raw inflation measurement does not adjust for expectations, but directly measures the change in the price of goods.

There are different measurements of price inflation, depending on the basket of goods selected. The most common measures are of consumer inflation, producer inflation and GDP deflators, or price indexes. The last measures inflation in the entire economy.

General price inflation is a fall in the purchasing power of money within an economy, as compared to currency devaluation which is the fall of the market value of a currency between economies. The extent to which these two phenomena are related is open to economic debate, though the comparison of a currency to foreign currencies is based on investor demand for currencies, and therefore must at least partially be a matter of perception.

Both of these are often caused by money being added to an economy, either as printed currency or as virtual money lent to banks or other entities. This is called currency inflation, and can cause price inflation or currency devaluation. But, because the general amount of wealth gradually changes in an economy (as long-lasting things are created, new technologies invented, et cetera), a small amount of currency inflation need not cause price inflation.

Some terms related to inflation:

- deflation is a rise in the purchasing power of money, and a corresponding lowering of prices (the opposite of inflation).
- Disinflation refers to slowing the rate of inflation, that is, prices are still rising, but at a slower rate than before.
- Reflation is a term used to denote inflation after a period of deflation, meaning inflation designed to restore prices to a previous level.
- Hyperinflation is rapid inflation without any tendency towards equilibrium - that is, an inflation that produces even more inflation.

In some contexts the word "inflation" is used to mean an increase in the money supply, which is seen as a cause of price increases. Some economists (of the Austrian school) still prefer this meaning of the term, rather than to mean the price increases themselves. Thus, for example, some observers refer to inflation in the 1920s in the United States even though the prices of some baskets of goods were not increasing at the time. Below, the word "inflation" will be used to refer to a general increase in prices unless otherwise specified.

## [தொகு] Measuring inflation

Inflation is measured differently by those who follow classical monetary theory than by those who study Neo-Keynesian theory. Neo-Keynesians observe inflation indirectly through the rise in prices of goods and services while Monetary Theorists directly watch the amount of currency.

Examples of common measures of inflation include:

- The M0, M1, M2, M3, M4 measures of Money supply
- The price of Gold and Silver
- The value of labour
- The cost-of-living index or CLI is the theoretical increase in the cost of living of an individual, which consumer price indexes (CPI) are supposed to approximate. Economists argue over whether a particular CPI over- or underestimates the CLI. This is referred to as "bias" within the CPI. The CLI may be adjusted for "purchasing power parity" to reflect the differences in prices for land or other local commodities which differ widely from world prices.

### [தொகு] Money supply

The amount of currency in an economy (the Money supply) is stated as M0, M1, M2, M3 and M4 each broader than the previous. As the amount of currency in circulation increases (inflation), its value decreases. This is the most direct way of measuring inflation as the amount of currency in bank accounts, bond, coins and paper notes, etc. is generally known to the government of each country. Observations of the money supply gives a much clearer picture of inflation because it responds quickly (as fast as banks report) and accounts for all inflation including that which occurs in financial markets as rising stock prices.

#### [தொகு] US FED discontinues reporting M3 data

படிமம்:M3a.jpg
M3 from 1959-2005

The M3 money supply has been reported since 1959.

The United States Federal Reserve (the Fed) has announced that it will stop reporting the M3 money supply data of the US dollar on March 23, 2006. This has started some speculation in the investment and banking community on the possible instability in the dollar system that the Fed is trying to hide. (The Federal Reserve is a system of eight to twelve regional reserve banks, owned by its commercial member banks and supervised by the Federal Reserve Board.) The Fed offers this brief note

### [தொகு] Gold

There is a saying "Gold is money, period.". Gold and silver have been used as money since the invention of money. These two precious metals are a benchmark of inflation and have held their value for millennia compared to the centuries, at most, of the Denarius and Pound sterling both of which started out based on precious metal. Gold has experienced an historical inflation rate of about 2% as new supplies are mined and refined and it is this immutable rate which has prompted governments throughout history to turn to the creation of fiat currency. While the rate of inflation of the gold supply is limited by the effort required to find feasable deposits, the labour required to mine the deposites that are found and the energy required to refine the mined ore in to gold, nothing effectively stops governments from printing fiat currency. Gold and silver, in one form or another, were used as money from at least 600 BC and are currently minted in to gold coin and silver coin all over the world.

At the Bretton Woods Conference, the Bretton Woods system solidified the gold standard by requiring the signatories to adopt an exchange rate for their currency. This system remained in place until Richard Nixon "closed the gold window" after France began to demand the gold represented by the U.S. dollars held by the central bank of France. This run on the U.S. gold deposits happened because there were more dollars in circulation than was backed by gold. Today, the U.S. Treasury values its gold at 42.2222 per troy ounce as stipulated by the Bretton Woods aggrement.

### [தொகு] Labour

Adam Smith proposed labour as the basic measure of value. In the first book of "The Wealth of Nations" he explains how all forms of money are valued by the amount of labour they command and that the value of labour is unchanging over the passage of time. Although this measure of value is static, it historically also tends to be poorly documented when compared to the value of metals or commodities such as corn.

### [தொகு] Prices

Neo-Keynesians measure inflation by observing the change in the price of a large number of goods and services in an economy (usually based on data collected by government agencies, although labor unions and business magazines have also done this job). The prices of goods and services are combined to give a price index. When the CPI was first created, this was an Arithmetic mean of the prices in the basket of goods, but when Alan Greenspan was chairing the Federal reserve the CPI changed to a Geometric mean which reduces the weighting of goods that are rising in price. This price level is then adjusted for changes in the underlying basket of goods, a process called hedonic adjustment. For example, if the base model of a car goes up in price but includes air conditioning, the price put in to the index will be adjusted down to account for improved model despite the fact that the consumer must pay for it whether the feature has value or not. This raises the question: what percentage of the price increase is inflationary, and how much should be counted for the new feature which some consumers may, or may not, want? Some inflation figures deliberately exclude volatile goods (e.g. energy and fuel) from the basket to be able to gauge the "core" rate of inflation despite the fact that they are basic components of everyday living and go in to every good delivered to a store shelf.

படிமம்:US-Inflation-by-year.png
U.S. Historical inflation rates 1914-2006.

The inflation rate as measured by Neo-Keynesians is the percentage rate of increase in this index; while the price level might be seen as measuring the size of a balloon, inflation refers to the rate of increase in its size. There is no single true measure of inflation, because the value of inflation will depend on the weight given to each good in the index, as well as the extent of the economic region being examined.

Because each measure is based on both other measures, and a model that brings them together, economists often dispute whether there is "bias" either in measurement or in the model of inflation. For example In 1995, the Boskin Commission found the CPI produced by the US Department of Labor's Bureau of Labor Statistics (BLS) to be a biased measure, and gave a quantitative analysis of the bias, arguing that inflation was overstated because of people substituting away from expensive goods, and because of the "hedonic" improvements that technology created, these both reduced the rate of CPI-U increase. Another example from the early 1980's was the finding that the rental component of the CPI-U and CPI-W did not factor in the increase on rental units that were unoccupied, and that, when factored in, the rate of inflation was dramatically understated. This change was adopted in 1982 into the CPI calculations.

Presently there are those who argue that even more hedonic adjustment should be factored in, including the tendency of people to move to less expensive areas when more expensive ones become out of reach. Increasing the hedonic adjustments also helps to control government costs as many are linked to CPI such as union labour contracts, pensions and social security. This exposes a conflict of interest in the governments publication of these figures.

Others argue that the housing part of the index is dramatically understating the impact of home values on cost of living, and dramatically under accounting for the cost of medications in the cost of living for retirees who's pensions are indexed to the CPI.

The most often overlooked price increases are those in the stock market. Inflation can manifest itself in many places besides house and consumer prices, and in today's world of computer trading, the financial markets are able to absorb massive amounts of inflation without causing the negative effects associated with an increase in the price of goods. This leads to an amplification of the negative effects over the long run as the problems can go unnoticed for long periods of time by the public at large; when the price of goods do start to rise, they do so under the huge pressure built up by the financial markets, like a dam holding back the flood.

Ultimately, there is no perfect answer to the question of how much price inflation has occurred over a particular period of time. This is especially true for long periods of time. For example, suppose you wanted to know the inflation rate between 1906 and 2006. How would you measure it? The majority of the GDP today consists of items that didn't exist in 1906. Raw agricultural products in 1906 may be identical to what exists today, as well as a small number of other consumer items. But the lifestyle that the average American enjoys today simply could not be purchased in 1906, even with all the money in the world. So measuring an appropriate inflation rate over that 100 years is impossible.

## [தொகு] Economic role

One effect of small steady inflation is that it is difficult to renegotiate some prices, and particularly wages and contracts, downwards, so that with generally increasing prices it is easier for relative prices to adjust. Many prices are "sticky downward" and tend to creep upward, so that efforts to attain a zero inflation rate (a constant price level) punish other sectors with falling prices, profits, and employment. Thus, some business executives see mild inflation as "greasing the wheels of commerce". Efforts to attain complete price stability can also lead to deflation (steadily falling prices), which can be very destructive, risking bankruptcy for companies that do not react, ultimately resulting in recession (or even depression).

Many in the financial community regard the "hidden risk" of inflation as an essential incentive to invest, rather than simply save, accumulated wealth. Inflation, from this perspective, is seen as the market expression of what the time value of money is. That is, if a dollar today is worth more to someone than a dollar a year from now, then there should be a discount in the economy as a whole for dollars in the future. From this perspective, inflation represents the uncertainty about the value of future dollars.

Inflation, however, above relatively low levels is generally considered as having increasingly negative effects on the economy. These negative effects are the result of "discounting" previous economic activity. Since inflation is often the result of government policies to increase the money supply, the government contribution to an inflationary environment is a tax on holding currency. As inflation increases, it increases the tax on holding currency, and therefore encourages spending and borrowing, which increase the velocity of money, and therefore reinforce the inflationary environment, a "vicious circle". To extremes this can become hyperinflation.

- Increasing uncertainty may discourage investment and saving. Panicky spending that tries to anticipate inflation has the effect of increasing the velocity of money and the inflationary cycle. Sudden spending also contributes to economic bubbles as demand (and thus prices) increase drastically.
- Redistribution
  - Inflation tends to redistribute wealth/income/purchasing power from those on fixed incomes, such as people living off bond interest or a fixed pension, to those whose income is based on market conditions (for example, wages and company dividends, which tend to keep pace with inflation).
  - Similarly inflation will redistribute wealth from those who lend a fixed amount of money to those who borrow (if the lenders are caught by surprise or cannot adjust to inflation). For example, if the government is a net debtor, as is usually the case, inflation will reduce the burden of the debt redistributing wealth towards the government. This effect is sometimes referred to as the "inflation tax". Inflation also penalizes those living off fixed wages or pensions.
- International trade: If the rate of inflation is higher than that abroad, a fixed exchange rate will be undermined through a weakening balance of trade.
- Shoe leather costs: Because the value of cash is eroded by inflation, people will tend to hold less cash during times of inflation. This imposes real costs, for example in more frequent trips to the bank. (The term is a humorous reference to the cost of replacing shoe leather worn out when walking to the bank.)
- Menu costs: Firms must change their prices more frequently, which imposes costs, for example with restaurants having to reprint menus, and stores having to re-price their goods.
- Hyperinflation: if inflation gets totally out of control (in the upward direction), it can grossly interfere with the normal workings of the economy, hurting its ability to supply. For example, the confusion resulting from not knowing whether prices went up because all prices are going up, or because the consumable resource is just more scarce can result in a less efficient use of the resource by the society.
- Investment Impact: Banks must charge higher interest rates on loans to compensate for inflation; this decreases net investment via shifting the supply curve for loans back.
- Innovation Impact: Inflation discourages innovation to decrease product price because price increases are 'justified' by the ongoing inflation.

In an economy where some sectors are "indexed" to inflation, while others are not, inflation acts as a redistribution towards the indexed sectors away from the unindexed sectors. Again, in small amounts this is a policy choice, acting as a tax on "liquidity preference" and hoarding, rather than saving. However, beyond this amount, the effect becomes distorting, as individuals begin "investing in inflation", which, again, encourages inflationary expectations.

Because of the above reasons for discouraging inflation above the small amounts needed to discount previous actions and discourage hoarding of currency, most central banks define price stability as a central goal, with a perceptible, but low, rate of inflation as the target.

## [தொகு] Causes

There are different schools of thought as to what causes inflation. The two most prevalent theories are the neo-classical theory that inflation is driven by increases in the money supply, often used to finance government spending and the neo-Keynesian view that inflation is the result of diminishing returns of productivity.

படிமம்:Inflation-growthmoneysupply.png
Scatterplot of money growth and inflation. The positive correlation between money growth and inflation suggests that high money growth leads to high inflation.

### [தொகு] Monetary theory

One of the oldest and most widespread theories of inflation is also the most straightforward: inflation is an increase in the supply of money. Before the invention of Fiat currency metals such as Copper, Silver and Gold were made in to Coins and used as currency. This placed a physical limit on the rate of inflation as the increase in metal for coinage was limited by the rate at which it could be mined and is why gold is considered money and not just currency.

The limits of metal supplies lead to the invention of Debasement by the Roman Empire. As the empire's need for currency rose, the precious metal content of the coins minted was replaced by base metals such as copper. This lead to an increase in the supply of currency and inflation. As a result of this debasement, the population began hoarding the coins made of gold. A concrete example of current day debasement is found in the penny which has not been made of copper since 1982. As with coins during the Roman empire, the more precious metal is replaced with a more base one; in this case zinc.

Misunderstandings of monetary theory have lead to the belief that inflation is related to the growth of GDP or to interest rates but this belies the simplicity of monetary theory which predates the Central bank or economic measures like GDP and GNP. Another misconception which monetary theory rejects is that prices are inflation and stems from the confusion between cause and effect. Prices are based upon the Scarcity of the currency being used and when the supply of the currency increased (the cause), the amount of currency needed to pay for a good or services rises (the effect). This is classically expressed as "Too much money chasing too few goods".

### [தொகு] Neo-Keynesian theory

According to Neo-Keynesian economic theory there are three major types of inflation, as part of what Robert J. Gordon calls the "triangle model":

- Demand pull inflation - inflation due to high demand for GDP and low unemployment, also known as Phillips Curve inflation.

- Cost push inflation - nowadays termed "supply shock inflation", due to an event such as a sudden increase in the price of oil.

- Built-in inflation - induced by adaptive expectations, often linked to the "price/wage spiral" because it involves workers trying to keep their wages up with prices and then employers passing higher costs on to consumers as higher prices as part of a "vicious circle". Built-in inflation reflects events in the past, and so might be seen as hangover inflation. It is also known as "inertial" inflation, "inflationary momentum", and even "structural inflation".

These three types of inflation can be added up at any time to get an explanation of the current inflation rate. However, over time, the first two (and the actual inflation rate) affect the amount of built-in inflation: persistently high (or low) actual inflation leads to higher (lower) built-in inflation.

Within the context of the triangle model, there are two main elements: movements along the Phillips Curve, for example as unemployment rates fall, encouraging greater inflation, and shifts of that curve, as when inflation rises or falls at a given unemployment rate.

#### [தொகு] Phillips curve or demand inflation

A major demand-pull theory centers on the supply of money: inflation may be caused by an increase in the quantity of money in circulation relative to the ability of the economy to supply (its potential output). This has been seen most graphically when governments have financed spending in a crisis by increasing the amount of currency in circulation to avoid the results of economic collapse, sometimes during wartime conditions. This has led to hyperinflation where prices rise at extremely high rates in short periods of time in extreme cases.

A fundamental concept in such Keynesian analysis is the relationship between inflation and unemployment, called the Phillips curve. In classical Keynesian economics this model suggested that price stability was a trade off against employment. Therefore some level of inflation could be considered desirable in order to minimize unemployment. The Philips curve model described the US experience well in the 1960s, but failed to describe the combination of rising inflation and economic stagnation (sometimes referred to as stagflation) experienced in the 1970s. The modern use of the Phillips curve relates payroll growth to the general inflation rate, rather than relating the unemployment rate to the inflation rate, and suggests that trade offs between inflation and employment are based on the change in the rate of inflation, rather than the inflation rate itself.

In this model, increases in aggregate demand drive prices upwards, as suppliers are aware that they have pricing power, which leads to more people working, which leads to increased aggregate demand.

#### [தொகு] Shifts of the Phillips curve

Thus, modern macroeconomics describes inflation using a Phillips curve that shifts (so the trade-off between inflation and unemployment changes) due to such matters as supply shocks and inflation becoming built into the normal workings of the economy. The former refers to such events as the oil shocks of the 1970s, while the latter refers to the price/wage spiral and inflationary expectations implying that the economy "normally" suffers from inflation. Thus, the Phillips curve represents only the demand-pull component of the triangle model.

Another Keynesian concept is the potential output (sometimes called the "natural gross domestic product"), a level of GDP where the economy is at its optimal level of production, given institutional and natural constraints. This level of output corresponds to the NAIRU or the "natural" rate of unemployment or the full-employment unemployment rate. In this framework, the built-in inflation rate is determined endogenously (by the normal workings of the economy):

- if GDP exceeds its potential (and unemployment is below the NAIRU), the theory says that, all else equal, inflation will accelerate as suppliers increase their prices and built-in inflation worsens. This causes the Phillips curve to shift in the stagflationary direction, toward greater inflation and greater unemployment. This kind of "inflationary acceleration" may have been seen in the late 1960s in the U.S., when Vietnam war spending (counteracted only by small tax hikes) kept unemployment below 4% for several years.

- if GDP falls below its potential level (and unemployment is above the NAIRU), all else equal inflation will decelerate as suppliers attempt to fill excess capacity, cutting prices and undermining built-in inflation: there is disinflation. This causes the Phillips curve to shift in the desired direction, toward less inflation and less unemployment. This disinflation may have been seen in the early 1980s, when Fed chief Paul Volcker's anti-inflation campaign kept unemployment high for several years and at almost 10% for two years.

- If GDP is equal to potential (and the unemployment rate equals the NAIRU), the inflation rate will not change, as long as there are no supply shocks. In the "long run," most neo-Keynesian macroeconomists see the Phillips Curve as vertical. That is, the unemployment rate is given and equal to the NAIRU, while there are a large number of possible inflation rates that can prevail at that unemployment rate.

However, one problem with this theory for policy-making purposes is that the exact level of potential output (and of the NAIRU) is generally unknown and tends to change over time. Inflation also seems to act in an asymmetric way, rising more quickly than it falls. Worse, it can change due to policy: for example, high unemployment under Prime Minister Margaret Thatcher in the U.K. may have led to a rise in the NAIRU (and a fall in potential) because many of the unemployed found themselves as structurally unemployed, unable to find jobs that fit their skills in the British economy. A rise in structural unemployment implies that a smaller percentage of the labor force can find jobs at the NAIRU, where the economy avoids crossing the threshold into the realm of accelerating inflation.

Most non-Keynesian theories of inflation can be understood within the neo-Keynesian perspective as assuming that the NAIRU and potential output are both unique and are attained relatively quickly. With the "supply side" at a fixed level, the amount of inflation is then determined by aggregate demand. The fixed supply side also implies that government and private-sector spending are always in conflict, so that government deficit spending leads to crowding out of the private sector and has no effect on the level of employment. Thus, it is only the money supply and monetary policy that determine the inflation rate.

#### [தொகு] Productivity

For these reasons neo-Keynesian theory focuses on productivity, because it is falling productivity which signals diminishing returns of production, and therefore inflationary pressures from overheating and output above "potential". From the neo-Keynesian perspective budget balancing and restraints on spending do not control inflation, and persistent budget deficits do not cause inflation. What causes inflation is an increase in the velocity of money, and the reduction in efficiency caused by excessive present consumption versus investment. That is, a savings rate that is too low to fund the improvements in production required to keep pace with increases in aggregate demand. Consequently neo-Keynesians such as Franco Modigliani warned that it is an insufficient savings rate which is the better predictor of future inflation.

#### [தொகு] Indexing and inertial inflation

In the 1980s several industrialized nations experienced persistent inflation, and attempted to address it by cutting budgets and engaging in IMF backed austerity plans. These plans had the paradoxical effect of causing people to flee the main currency, and pushing up the inflation rate. The next round of programs were targeted at reducing budget deficits, but they focused on ending wage indexing and on cutting government subsidies for commodities, instead of simply reducing government spending in the aggregate. Neo-Keynesians argue that the experience of Israel, Argentina, Bolivia and Brazil in dealing with inflation and hyperinflation shows that government budget deficits are exogenous to money supply growth, and that therefore central banks which are accommodating them may not have the autonomy to constrict the money supply. Thus it is fiscal, not monetary policy, which is the main agent for driving inflation where governments use seigniorage as an active source of revenue where the market for money clears.

### [தொகு] Other theories of inflation

#### [தொகு] Austrian Economics

The Austrian School of Economics defines inflation as "an inflation of the supply of money." All other things being equal, inflation can be expected to cause an increase in prices, but exactly which prices are affected when and how much will depend on how the newly created money was introduced to the system, and how the new money spreads throughout the economy. Therefore, in the Austrian view, it is possible that changes in productivity (or other factors) will drive down the price of any arbtirarily chosen basket of goods, even in the presence of inflation (of the money supply). Thus fighting inflation is very simple in Austrian framework: just stop creating new money. Increasing prices can have many causes, and inflation (of the money supply) is but one.

Austrian theory would dispute the idea that mild "deflation" (in the non-Austrian sense, i.e. a decline in the general price level) is something to be avoided. Instead, this is seen as a natural way of passing on productivity gains to those who have deferred consumption. Sudden contractions in the money supply can undoubtedly disrupt business plans which depended on continuous injections of new money, and bank runs are certainly unhealthy, but that doesn't mean all decreases in prices are inherently bad, or that continuing to inflate just to maintain inflation-dependent enterprises is the correct policy. See http://www.mises.org/journals/qjae/pdf/qjae6_4_8.pdf.

#### [தொகு] Supply-side economics

Supply-side economics asserts that inflation is always caused by either an increase in the supply of base money or a decrease in the demand for base money (or both). The value of money is seen as being purely subject to these two factors. Thus the inflation experienced during the Black Plague in medieval Europe is seen as being caused by a decrease in the demand for money as the volume of production and trade fell, while the inflation of the 1970s is regarded as been initially caused by an increased supply of money that occurred following the US exit from the Bretton Woods gold standard. Supply-side economics asserts that the money supply can grow without causing inflation as long as the demand for money also grows at the same rate.

One of the factors that supply side economists say was instrumental in ending the US experience of high inflation was the economic expansion of the 1980s ushered in by lower taxes. The argument is that an expanding economy creates an increased demand for base money and in so doing it counteracts inflationary forces. An expanding economy can be seen as frequently leading to an increased demand for money, and, all else being equal, an increase in the value of money. In international currency markets this principle is mostly undisputed, however, supply side economists argue that economic expansion increases the domestic valuation of money and not just the international valuation.

#### [தொகு] Welfare economics

Welfare economics takes the concept that the real purchasing power of an individual is measured in the basket of commodities that they can command. Therefore, it measures standard of living differently from GDP and price level, and instead uses the concept of "welfare" or happiness grounded in other measures. Neoclassical economics defines utility as being related to price, and therefore does not need to look at separate components of general welfare individually, only their aggregate price. This view is used by Marxian economists to argue that production and not consumption should be central to the definition of inflation.

This view stands outside that of mainstream economic thought, but is influential in political economy. Measures of well being are used by NGOs in arguing for greater aid, and Bhutan has adopted a happiness, rather than product based measure of standard of living.

## [தொகு] Stopping inflation

There are a number of methods which have been suggested to stop inflation.

### [தொகு] Monetary policy

Central banks such as the U.S. Federal Reserve System can affect inflation to a significant extent through setting interest rates and through other operations (i.e., using monetary policy). High interest rates (and slow growth of the money supply) are the traditional ways that central banks fight inflation, using unemployment and the decline of production to prevent price increases.

However, Central Banks view the means of controlling the inflation differently. For instance, some follow a symmetrical inflation target while others only control inflation when it gets too high. The European Central Bank has come under some criticism for following the latter practice, especially in the face of high unemployment.

- Monetarists emphasize increasing interest rates by reducing the money supply through monetary policy to fight inflation.
- Keynesians emphasize reducing demand in general, often through fiscal policy, using increased taxation or reduced government spending to reduce demand. They also note the role of monetary policy, particularly for inflation in basic commodities from the work of Robert Solow.
- Supply-side economists advocate fighting inflation by fixing the exchange rate between the currency and some stable reference currency such as gold, or by reducing marginal tax rates in a floating currency regime to encourage capital formation.

All of these policies are achieved in practice through a process of open market operations.

### [தொகு] Price controls

Another method attempted is simply instituting wage and price controls (see "incomes policies"). They are related to Price supports, which set minimum prices to prevent deflation, or to maintain a particular good or service in production.

#### [தொகு] Price controls and their aftermath

In general, most economists regard price controls as counterproductive in that they tend to distort the functioning of the economy because they encourage shortages, decreases in the quality of products or the use of "black market" exchanges. The only exception is during war time, when shortages are expected, and the purpose is to allow the government to borrow money at a lower rate of interest than could be obtained normally, as well as prevent war profiteering of various kinds. The price controls used during World War II in the United States were effective not only at controlling inflation during the war, but after the war as well.

Another criticism of price controls is that they work only so long as they are in force, removal tends to produce more inflation than would have been obtained without them. War time price controls are criticized because they are often maintained long after the war has ended, because they act as a transfer of wealth from some producers to others, and to consumers who then overconsume the price controlled commodity. Controls on rent, for example, often remain in force for decades, because it allows property owners to limit the rate of new building, making it possible to maintain capital parity more easily, and renters to stay in one place for a long period of time with a net reduction in the cost of rent, since inflation reduces the burden of a fixed rental price.

Controls may complement a recession as a way to fight inflation: the controls make the recession more efficient as a way to fight inflation (reducing the need to increase unemployment), while the recession prevents the kinds of distortions that controls cause when demand is high.

#### [தொகு] Inflation and money supply

Neo-Keynesians would say that the money supply may increase without inflation occurring. One example is the U.S. money supply, which has been increasing at a much faster rate than inflation as measured by the CPI. This phenomenon occurs because there has been a trend of rising global demand for the U.S. dollar, which has become a global currency for the exchange of goods. More goods are available to be purchased by the dollar, if there were no expansion in the supply of the dollar, the price of goods would drop. However, the expansionary policy of the FED (the "printing of more money out of the thin air" through the Open Market Operations) has not only stopped deflation, it also has created slight inflation. It must be noted though that if there had been no increase in the demand for the dollar, the increase in the supply of money would surely have meant high inflation as seen in the 1970s.

Monetary theorists would point to the price of both oil and gold as disproving this assertion. Since the U.S. dollar was taken off the gold standard, it has lost 95% of its value against gold.

#### [தொகு] Wealth redistribution effect of increased money supply

If the total money supply has increased, even if there were no inflation (similar to the low inflation environment in the US. in the early 2000's), what would be the wealth redistribution effect if any? The assets and commodities that would go up in value are those whose supply are finite or non-renewable (such as fossile fuel and real estate near areas of centers of trades). The assets and commodities whose supply are increasing would see its value to fall (including money). How can the value of money to fall when there is no inflation? This is because inflation has a very narrow definition. Some popular attempts to measure do not take into account the rise in price of essential commodities (such as energy) and the price of essential assets (such as real estate). These essential commodities and assets can become more expensive when the money supply increases but they are not measured by the standard measures of inflation. In scenarios like this, increased money supply redistributes wealth from the holders of money to the holders of finite assets and commodity regardless of inflation.

## [தொகு] See also

- Fractional-reserve banking
- Money creation
- Real versus nominal value

## [தொகு] References

1. Barro, Robert J. Macroeconomics
2. Brown, A. World Inflation Since 1950
3. Case, Karl E. and Fair, Ray C. Principles of Macroeconomics
4. Bureau of Labor Statistics
5. Kieler, Mads The ECB's Inflation Objective
6. Marx, Karl Wages, Profits and Prices,
7. Puplava, Jim, The GREAT inflation
8. Reisman, George Capitalism: A Treatise on Economics (Ottawa : Jameson Books, 1990), 503-506 & Chapter 19 ISBN 0915463733
9. Murray N. Rothbard, What has government done to our money? ISBN 0945466102. Good introduction to Austrian school's view on money, inflation etc.
10. Sobel, Robert The Worldly Economists (1980).
11. Bonner, William "Empire of Debt" 2006
12. Smith, Adam The Wealth of Nations 1776 [1]

## [தொகு] External links

- How Much Is That - US and UK inflation and other purchasing power calculations, 1264-present
- Wages, Prices & Living Standards: The World-Historical Perspective
- Inflation - The mechanics of inflation: the great government swindle and how it works An analysis of the mechanics of inflation as a government "swindle."
- Inflation Calculator Lets you adjust a price for inflation, backward or forward between the present and the previous 100 years
- Historicalstatistics.org Links to historical demographic and economic statistics.

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