Government deficit spending circulates worthless money and increases the money supply beyond demand. This dilutes the value of the dollar. It also increases the cost of imports and oil in particular.
To stem the inflation tide, the central bank increases interest rates to tighten the money supply. This makes less money available to the economy but does nothing to halt the reason for the start of the inflationary cycle: government deficit spending.
How can the central bank's efforts be effective as long as government spending is out of control?
2007-06-27
00:12:57
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8 answers
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