How is the rate of production and employment in the US linked to Inflation and the currency of money?

at the moment the fed has cut the federal fundes rate by 50 basis points. Why did they do this? to help the fiancial markets and housing markets only? The cut is bringing jobs to people-now there is the opportuinity to b uild houses again so this is causing productivity..but...how is this related to INFLATION...How would prodcutivity produce inflation..probably if the price of things stay normal but the salries of people go down...right? and how is this linked to the price of the dollar..in some way this determines the price of the dollar.Explain. thanks

How is the rate of production and employment in the US linked to Inflation and the currency of money?
The other user's answer is exactly right, but let me give you a bit of a different explanation just so you've got a couple of things to bounce around in your head.





First, it's important to understand what inflation really is. Simply, inflation is when it costs more to buy the same thing. Generally, there are 3 reasons why inflation goes up:





(1) The money supply goes up. In other words, there are literally more dollars in circulation. Money is a commodity like any other good -- be it a loaf of bread or a McDonald's hamburger. Therefore, money also obeys the laws of Supply and Demand. When the supply goes up, the value goes down. The more currency there is in the system, the less it is worth. That's one reason why a hamburger that used to cost 5 cents in 1950 now costs $3 -- there are simply many more actual dollars in circulation.





(2) Demand-push inflation. More people are trying to buy the same good, therefore the cost goes up.





(3) Cost-push inflation. The cost of producing a good goes up. For example, say that it costs McDonald's more to buy their hamburger patties. In order to stay profitable, they will raise the price of their hamburgers to absorb that cost.





OK, so you're asking two broad questions: (1) Why did the Fed cut the rate, and what does that actually mean? (2) Why does increased productivity result in inflation?





Let's tackle them one by one:





(1) Why did the Fed cut the rate? What does that mean?





First, it's important to understand what rate the Fed cut, and what the really means. The Feds cut the Federal Funds Rate, which is a short-term borrowing rate. It is literally an overnight lending rate that banks charge each other. It's important since it influences the amount of interest consumers must pay for various types of debt, such as credit cards, home equity lines of credit and auto loans. The Fed did this for two reasons:





(a) By cutting the rate, the expected monthly mortgage payment of people who have Adjustable Rate Mortgages shouldn't go up as money, making it easier for home owners to pay their mortgages. It also makes it easier for people to afford new mortgages, which the Fed is hoping will stimulate buying homes and keep the housing market afloat.





(b) It wanted to increase liquidity -- the ability to change an asset into cash -- in order to help people get out of bad investments. In this case, increasing liquidity helped creditors, banks, and mortgage companies to survive the high default rate we're seeing from sub-prime lenders.





It is important to note that the Fed did NOT cut the rate to spur economic growth -- in fact, that's one of the things they are worried about because too much economic growth can lead to inflation. But we'll come to that in a minute. For right now, here's why cutting rates spurs economic growth:





Cutting rates makes it easier for people to borrow money. This stimulates job growth because companies can now borrow money to expand their business, or people can borrow money to start up a business. This results in more jobs being created.





(2) Rate of Production / Employment Relationship to Inflation:





So what does this have to do with inflation?





Remember, inflation goes up -- meaning the value of the dollar goes down -- when the monetary supply increases. The more dollars that are in circulation, the less each individual dollar is worth because of the laws of Supply and Demand.





The number one cause of inflation in this scenario -- where the Feds have cut the rate -- is that banks will now be able to make more loans to more people. In other words, they are literally taking dollars out of their vaults and giving them to consumers who are now spending them on the street. There are more dollars in circulation. So, the monetary supply has gone up, and the value of the dollar has gone down. Voila! You have inflation.





However, what you're asking about is why the rate of production and employment drive inflation up. Here's the reason, although it is not necessarily applicable to this case:





Assuming that more jobs have been created, there is an increase in economic activity. More people have money, and they want to spend that money. This is called "demand-push inflation," whereby more consumers are demanding goods. In other words, more people want to buy McDonald's hamburgers, so the price goes up. Your dollar used to buy you a hamburger, but now you need more dollars to buy the same hamburger. Voila! Inflation.





I know that's a long answer, but if you're not familiar with the basic economic terms being thrown around, hopefully this should make it a bit easier to understand.
Reply:The increased level of production may eventually cause bottlenecks/shortages in labor or kapital (i.e., natural resources, plant capacity, refining capacity, etc.). These shortages will cause an increase in their prices. This is how excessive monetary stimulus causes inflation.





As for the price of the dollar relative to other currencies, loose monetary policy increases the number of dollars in circulation. Just as with any normal good, when the supply of dollars increases, their value decreases.