Expected and Unexpected Inflation
Expected Inflation Expected inflation is the inflation that economic agents anticipate in the future. Expected inflation leads to “menu cost,” which refers to a scenario in which businesses change their advertised prices constantly. The constant fluctuation of prices is due…
Roles and Objectives of Central Banks
Objectives of Central Banks The main objective of a central bank is to ensure financial stability. Depending on the country, central banks might have other objectives such as controlling inflation, unemployment, interest rates, or exchange rates. However, all these objectives…
The Fisher Effect
[vsw id=”opwhOwJygDA” source=”youtube” width=”611″ height=”344″ autoplay=”no”] The Fisher effect was developed by an economist named Irvin Fisher. This effect is directly connected to the neutrality of money. It states that the real interest rate is stable in an economy and…
Demand and Supply of Money
Supply of Money Like any other market, demand and supply of money will interact to produce an equilibrium price of money. The graph below shows the supply and demand for money. The money supply (MS – M/P) is vertical since…
Money Creation Process
[vsw id=”opwhOwJygDA” source=”youtube” width=”611″ height=”344″ autoplay=”no”] The money creation process is very helpful in understanding the role of money in the economy. The strength of money creation is influenced by the amount kept in the bank as a reserve for…
Comparison of Monetary and Fiscal Policy
Monetary policy and fiscal policy refer to government policies and tools used to control macroeconomic variables and financial markets. Whenever economic activities start to slow down, these tools are used to accelerate growth. Similarly, when the economy starts to overheat,…
Cost-push and Demand-pull Inflation
Cost-push Inflation Aggregate supply is the total amount of goods and services produced by an economy at a given price level. Cost-push inflation is attributed to a reduction in the aggregate supply caused by a rise in the cost of…
Construction of Indices Used to Measure Inflation
[vsw id=”Zl_eRBczasU” source=”youtube” width=”611″ height=”344″ autoplay=”no”] Since inflation is impactful on the general price level of an economy, it is tantamount to measure inflation using a price index. As such, it is important to understand how a price index is…
