- By Yasser Aboraya -
Back for some more, huh? Well, if you have missed our Economics 101
article then go and check it out. Anyways, let us pick up where we left off.
Inflation, devaluation, استيماشن
Like anything else, money loses its value if it is abundant, and when this happens, inflation blesses us with its presence. By definition, inflation is the general increase in prices; put in another way, it is the decrease in the purchasing power of money.
So why does inflation happen? For example, if the government decides to print more money…BAM! Another way to affect the value of a currency is to allow the market to determine a currency’s value through the forces of supply and demand.
On the other hand, a revaluation of a certain currency can occur if the government decides to set a benchmark to maintain a certain value for the currency (.i.e. what om el donia has been doing for the past God-knows how many years). We call that a fixed or pegged exchange rate regime, which involves pegging a thinly traded currency’s value to a globally demanded one, such as the dollar, or gold and silver bullion.
Health of the economy
Since we covered money and currencies, you must have noticed that some currencies are stronger than others And you probably ask yourself why? Well, money is essentially a store of value, so it should be stable and widely accepted by the masses, which is tied to the state of the economy.
For instance, if a currency is experiencing several streaks of devaluation or revaluation, or if the country is in financial distress due to excessive borrowing, the value of the currency – which is essentially representative of the economy – will go down. This is why most international trade takes place in USD due to the consensus that the U.S. of A is a stable and powerful economy.
Monetary and Fiscal what again?
Okay, so you are sitting one evening and you hear about the new monetary policy on increasing money supply or that the government is starting to increase taxes through its fiscal policy. Next, you go on some social network and start blabbing as if you are the vice president of the World Bank (Shame on you).
Anyhow, a monetary policy represents the set of rules set by the central bank of any given country to manage things like inflation, money supply, and interest rates. On the other hand, a fiscal policy is the government’s tool to manage taxes, spending, and welfare spending (in terms of benefits, subsidies, health insurance, etc…).
That’s enough for one day, next class will resume with different economic ideologies. *Drops the Mic*