The central bank has just recently announced that due to the high price level, w

Question

The central bank has just recently announced that due to the high price level, which has led to rising inflation, it would mop up excess money from circulation. Based on the relationship between money supply and inflation observed from 2004 to 2010, do you think there is any justification for the central bank to mop up money from circulation? Use references to support your response.

b. Explain two economic consequences for an individual and two economic consequences for an economy of an increase in its price level.
The central bank has just recently announced that due to the high price level, which has led to rising inflation, it would mop up excess money from circulation. Based on the relationship between money supply and inflation observed from 2004 to 2010, do you think there is any justification for the central bank to mop up money from circulation? Use references to support your response.

b. Explain two economic consequences for an individual and two economic consequences for an economy of an increase in its price level.


b. Explain two economic consequences for an individual and two economic consequences for an economy of an increase in its price level.

Explanation / Answer

Central bank reduces the money supply, so that the demand for goods will decrease and prices will not see an increase that comes from higher demand for goods. Decreasing. or increasing money supply works for increasing or decreasing inflation. This has been done over the last many years by central banks to overcome the impact of economic crisis that began in 2007 and has impacted economies around the world.

Economic consequences for an individual:

1. Higher interest rates for investment in bonds, debt instruments

2. Lower prices but demand would also be low as money would go into investment rather than purchase

Two economic consequences for an economy due to increase in inflation:

1. The value of money decreases; real interest rates for instruments decrease as inflation increases even if the nominal interest rates are increased

2. More money is available to the industry and individuals from banks; banks can easily extend credit

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