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Student Question

Should the United States institute policies that seek to raise the value of the dollar, lower the value of the dollar, or stabilize the value of the dollar? Please explain the pros and cons of your choice.

Quick answer:

The question of whether or not it is desirable to inflate the currency depends on the desired economic priority in a struggling economy, stabilizing the system or providing relief.

Expert Answers

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In a struggling economy, monetary policy often reflects the priorities of the administration in place.

Some make the case that inflation of the currency serves as the best way to address the needs of a struggling economy. Inflation is said to be "too many dollars chasing too few goods" and is marked by the decline in the value of a dollar relative to goods and services purchased. Generally, it helps those in debt and hurts those who have lended capital to others because it shrinks the value of the debt. This can benefit a much larger number of people in the short term by making their debt more bearable but can also raise the price of essential goods. At the same time, wages during inflation rarely keep up with the rise of prices.

During the presidency of Ulysses S. Grant, the nation fell into a significant economic depression. Grant's administration followed what they called a "sound money" policy that sought to stabilize the value of the dollar and resist popular pleas for inflation. This did not provide much relief for debtors, but it did strengthen banks and other financial services businesses that had taken a hit. Because they had confidence in Grant's fiscal policy, they could continue to take risks despite the bad economy. Under Grant's policy, this depression ended years earlier than that which started under Herbert Hoover. While it did not provide the short-term relief many desired, the overall impact was less than it could have been, and the economy recovered fairly quickly relative to the damage done to it.

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