Macro Economics Assignment 3
1a. According to Nobel laurate Milton Friedman, “Inflation is an old, old disease. We have had thousands of years of experience of it. There is nothing simpler than stopping an inflation – from the technical point of view.”
If inflation were a disease, then what is the cause of the disease? How do you cure the disease? What are the effects of this disease? Please watch the following videos by Milton Friedman to answer the above questions.
Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. Central banks attempt to limit inflation, and avoid deflation, in order to keep the economy running smoothly. As a result of inflation, the purchasing power of a unit of currency falls.
Milton Friedman termed it as a dangerous and fatal disease which if allowed to spread unchecked can ultimately destroy the society. It occurs as a result of too much money in the market. The increase in the quantity of money more than the output brings about inflation. The causes of Inflation have been attributed to many things over the years such as greedy businessmen, Trade unions, Spendthrift consumers, etc. However that’s not the case. The main responsibility of inflation falls on the Government. According to Milton Friedman, the primary causes of inflation are as listed below: * Control of the Printing Press: The printing press is under the control of the Government. Hence, the amount of money that is in the market is provided by the Government and the increase in the quantity of money is thus brought about. Quantity theory of money states that, MV=PY, where, M=money supply, V=velocity of circulation of money, P=price level and Y=National Income. To change the output of the economy, the central bank of a country often increases money supply by way of