Inflation And Money Growth

During the recent economic recession that began towards the end of 2008, the rising inflation rate was a topic of concern among the average consumer. Inflation occurs when the general price level increases, causing the average consumer to lose their purchasing power; taking away from the average consumer’s consumption. During this time period, unemployment levels were also increasing, thereby causing a stagflation in the economy. However, the main question is: what is the primary cause of inflation? One of the principal teachings of economics is the positive correlation between inflation and money growth. One of the simplest ways to look the correlation is using the simple supply and demand model. There is the general price level on the vertical axis and the money supply on the horizontal axis. There will also be a negative sloped supply curve and positive sloped demand curve that intersect each other. The point of intersection represents the equilibrium price and quantity. If the supply curve shifts outward (increases), it results in a price decrease of money and an increase in the overall money supply. Therefore, the government must be careful to not print too much money because it can decrease the overall value of money which leads to a higher price of consumption. One of the key concepts to always follow in economics is that in the event of high money growth, there will always be high inflation. Inflation is unsustainable without a proper monetary accommodation. Throughout history, there have been absolutely no cases where low inflation occurred with high money growth or high inflation occurred with low money growth. This requires central banks to ensure that money growth is not occurring at an increasing rate to prevent infla...

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...d effects on the economy’s level of output and employment. But money is a funny thing. Printing it faster does not ultimately create real wealth, and one of the most important lessons in macroeconomics – and it is a difficult one to learn in detail – is that the short-run influence that central banks have on output and employment disappears over time, to be replaced by an influence mostly on the rate of inflation. Over periods of many years, the single most important cause of inflation is the rate of money growth, and this comes mostly from monetary policy.” (“Understanding the crucial link between money supply and inflation,” 2014) For the entire central bank to be in equilibrium, the money demanded is equal to the money supply. When in equilibrium, both values equal the quantity of money in the economy. This concludes the theory that money growth equals inflation.