Some Economists Argue That Simply and Suddenly Reducing Money Supply

question 39

Essay

Some economists argue that simply and suddenly reducing money supply growth is a costly way to reduce inflation and that it may not work.For example,if a government cuts money growth but makes no real fiscal reforms,people will expect the government will eventually need to expand the money supply to pay for its expenditures.Thus,the promise to fight inflation will not be credible.Explain why credibility is important to a reduction in the inflation rate.

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Definitions:

Nonfinancial Factors

Aspects influencing decision-making that are not quantifiable in monetary terms, such as environmental impact or employee satisfaction.

Present Value

The worth at present of a future amount of money or sequence of financial flows, factoring in a specified rate of return.

Net Cash Flow

The total amount of money being transferred into and out of a business, specifically the sum of cash receipts minus cash payments over a given period of time.

Maximum Cost

The highest possible expense that can be incurred for a specific activity, project, or purchase.