According to Board of governors of Federal Reserve System (2015), Contemporary society do not prefer printing and distributing physical money as a means of contorting money supply but instead are adopting other measures. This is because emerging financial instruments and changes in the means in which people hold money make traditional control methods very unpredictable. Additionally, money printing has always resulted into serious disasters resulting into serious hyperinflations and recession. The federal government therefore stopped controlling money aggregates and now adjusts important interest rates as means of controlling flow of money in the economy. Interest rates are manipulated to increase or decrease monetary flow in the economy thus managing inflation and employment rates (Board of governors of Federal Reserve System, 2015) .
Economically, inflations understood as the rise in price of commodities and services as a result of increased money supply. Inflation occurs when an increase in production of physical money faster than productivity . It is true that changes in finical environment through policies significantly impact economic undertakings. When the policies lower short-term and long-term interest rates, the cost of borrowing goes down. This increases household purchase power of good and services. Companies adjust to this increased purchase power by hiring more workers to increase their output production to meet the high demands of commodities. Many people are therefore employed in companies as workers. In turn, wealth per household increase which in turn even ignites more spending. The vice – versa is true (Mankiw, 2015).
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Regarding inflation, when the rates go down, the rising demand of goods and services inflates the cost of wages and other products in demand. This is because the demand for worker and products is relatively higher. Whenever demand is higher than the supply, the costs are likely to go up.
References
Board of governors of Federal Reserve System. (2015). how does monetary policies influence inflation and employment . Retrieved from https://www.federalreserve.gov/faqs/money_12856.htm
Mankiw, N. G. (2015). Essentials of economics . Stamford: Centage Learning.
