Economics A2 · Government macroeconomic intervention. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.
The macroeconomic problems are connected. The internal value of money is what a unit of money buys at home; it falls when prices rise. The external value is the exchange rate. Higher inflation than in trading partners makes exports less competitive, worsens the current account and tends to lower the exchange rate. A lower exchange rate then raises import prices and adds to inflation.
Growth led by demand near full capacity raises inflation and pulls in imports. Growth led by supply or by exports can come with lower inflation and a stronger current account.
The Phillips curve shows a trade-off between inflation and unemployment, but the expectations-augmented version says it lasts only in the short run.
If prices rise by 25%, students say money has lost 25% of its value. It has lost 20%, because the value of money is the inverse of the price level (1 ÷ 1.25 = 0.8).
Answer: The internal value of money falls by 20%.
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