Determine which scenario would NOT call for the Fed to intervene. Annual inflation is around 2%....

Determine which scenario would NOT call for the Fed to intervene.

Annual inflation is around 2%.
Prices are decreasing quickly; real value of the currency is rising.
The economy is reaching hyperinflation.
Prices are increasing rapidly; real value of the currency is falling.

Solutions

Expert Solution

a. Fed usually targets inflation of 2% so the fed will not interfere in this scenario only.

If the prices are decreasing quickly, it is deflation that is harmful to a country so fed will have to intervene. The real value of currency is rising. When this happens, the imported goods will be cheaper and if a country imports raw material, almost all goods become cheap Like a Petroleum importing country will suffer if the value of its currency goes up quickly. When this happens over time, it does not affect that much as the economy compensates for it automatically.

Hyperinflation like recently in Venezuela is also really bad, in hyperinflation, the value of the currency goes down quickly and people are able to buy less from the money they have as time passes.

If prices are rising quickly, it is inflation but at a rapid rate, inflation is also bad. The real value of the currency is falling meaning the currency will now be exchanged for less with other currencies. This happens when supply is more and the demand for the currency is less.

Rahul Sunny answered 1 year ago

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