(L50) Fiat Money & Government Interference

1.) What problems do price ceilings cause, and what are the benefits of letting prices adjust without government interference?

Price ceilings lower the quantity of products available to consumers, and raise the demand all at the same time. This causes shortages. Allowing prices to adjust themselves would allow producers to accurately interpret economic signals and meet the needs of consumers in a highly efficient fashion.

2.) Name and explain three disadvantages that have been identified with fiat money.

One disadvantage that has been identified with fiat money is the fact that when the government (really The Federal Reserve) increases the paper money supply, prices rise to a level that they would not have naturally reached without intervention. Another disadvantage to fiat money is that it increases the power of the government. Because they can create new money from thin air and there is no limit to how many paper bills they can print, they have, in a general sense, unlimited resources. Adding onto this, when new money is created there is a distortion in the distribution of money throughout the economy, because whoever receives the new money first is spending it at the prices of the old money. (When new money makes its way through the economy, prices rise; however those who are the first to receive the money have not yet experienced this rise in prices, and are therefore favored in this process.) The losers of this process are those who get the new money at the end of the process, or by the time it has already taken it’s toll on the economy.

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