how does a country control/fix inflation?
In: 14
Inflation is caused by the government, anyone who tells you otherwise is ignorant or lying. Governments spend more than they being in, requiring them to sell bonds, or IOUs, in order to fund their budget.
Central banks create inflation by buying this government debt (treasuries or IOUs) with fake money, which is what is meant by printing money, in order to create liquidity in the market, because people don’t want to buy bonds from a government that doesn’t look like it can repay them with interest. They would demand a higher interest rate for the extra risk. But the Federal Reserve Bank, the US’s central bank, for example, will buy bonds with fake money so that the bond market stays liquid and lenders keep buying bonds. Because they are pumping more money into the economy but adding no actual value, there are more dollars to share the same total worth. Therefore, each dollar in existence becomes a little less valuable, which means you need more of them to buy goods and services. This is inflation.
A central bank can reduce inflation by raising interest rates, which means they have to sell those IOUs back to the banks they bought them from, thereby taking dollars back out of the economy, which means there are fewer dollars to share the total value.
Latest Answers