This website uses cookies to ensure you have the best experience. Learn more

Discuss How Increases In The Money Supply May Increase The Rate Of Inflation In An Economy Highfield Essay

1069 words - 5 pages

Using the data and your own economic knowledge, discuss the extent to which increases in the money supply may increase the rate of inflation in an economy ( 25 marks)
Money supply is defined as the total stock of money in the economy; currency held by the public plus money in accounts in banks, inflation is defined as the general increase in the price level and a fall in the purchasing power of money.
It has been suggested the theory of the quantity theory of money which puts forward the idea that MV=PT whereby M= quantity of money in the economy; V= velocity of circulation; P= price level and T= volume of transactions i.e. essentially the speed at which money circulated the economy is equal to the price level at which the number of times the money changes hands. It became a basis of theory of which monetarists believe V and T are constant in the short run, only changing in the long run. In its simplest form, the quantity theory suggests a 10% increase in the money supply would lead to a 10% increase in inflation. Monetarists believe inflation is solely caused by increases in the money supply, no other factor e.g. rising oil prices would have influenced unless accompanied by an increase in the money supply and also that any increase in money holdings will be spent on real goods and services not bonds (believed by Keynesian economists).
The velocity of circulation in the long run will depend on how frequently people are paid- V will be higher if paid weekly; use of credit cards- the more often they are used the money will be in their possession for longer and so the bill is paid off at the end of the month and speculative demand for money- people may choose to buy bonds or save rather than spend reducing V.
Keynesians believe the speculative demand for money is sensitive to changed in interest rates- If rates rise people would have less incentive to spend as they would have a higher rate of return by saving rather than spending therefore reducing V, this will also happen if they purchase bonds. Whereas monetarists believe people will hold money for transactions rather than for speculative purchases. They also believe they money supply should only be allowed to increase at the same rate as money GDP (trend growth rate of 2.25%) therefore monetary policy should aim to control growth of money aggregates. However Keynesians believe a growth in the money supply simply accommodates inflation, but is not the cause.
In the 1980s, monetary policy aimed to control the money supply, however when the authorities try to control one measure of money e.g. M3, the relationship between that measure and economic activity broke down. Other financial assets took on the told of medium of exchange instead- control of the money supply had been abandoned- the central banks now target demand for money instead using interest rates.
Keynes, however holds a different view: he believes the velocity of circulation is not always fixed, in certain circumstances it could slow...

Find Another Essay On discuss how increases in the money supply may increase the rate of inflation in an economy - Highfield - Essay

Assess the view that inflation is always caused by an increase in Aggregate Demand

641 words - 3 pages in all markets. Due to this extension in aggregate demand, firms will increase prices within each market leading to average price rises and inflation.Another factor which would cause demand-pull inflation would be a boost in consumer confidence such as the one which occurs when an economy reaches the recovery stage after emerging from recession. Due to the boost in consumer confidence and increasing amount of money is spent on goods and services

Assess the view that inflation is always caused by an Increase in Aggregate Demand

641 words - 3 pages in all markets. Due to this extension in aggregate demand, firms will increase prices within each market leading to average price rises and inflation.Another factor which would cause demand-pull inflation would be a boost in consumer confidence such as the one which occurs when an economy reaches the recovery stage after emerging from recession. Due to the boost in consumer confidence and increasing amount of money is spent on goods and services

How do interest rates influence the rate of inflation

1594 words - 6 pages the short-run aggregate supply curve. The result is an increase in the price level (see diagram). This is demand-pull inflation and may be caused by a growth in the money supply, leading to 'too much money chasing too few goods'. It is this cause of inflation which interest rates tame in order to control the rate of growth of the price level.Interest rates have a large impact on several components of aggregate demand. The transmission mechanism of

Analysis of the Increase in Charitable Giving Despite Tough Economy

589 words - 2 pages Despite 2008 seeing the largest annual drop ((5.6% decrease from 2007 in inflation-adjusted dollars)) since these statistics have been tracked, over $300 billion was donated to charitable organizations—three-quarters of which came from individual donors. (FOUDNATION CENTER CITATION) It is no wonder then that such a large amount of academic study has been invested in the subject. A myriad of studies have sought to investigate the motivations

The Role Of Money In The U.S. Economy

2453 words - 10 pages recession. The Fed must act to keep the supply of credit money in reasonable balance with the production of real goods and services. Price inflation is thought to be caused by "too much money chasing too few goods." There are many reasons for inflation and in some cases; an excess of money drives inflationary prices. More often than not, increases in the money supply follow an increase in prices. In our present day fiat money system, all money is

As age increases books increase the content of Multiculturalism

2972 words - 12 pages As Age Increases, Books Increase the Content of Critical MulticulturalismAccording to McLaren (1994), a critical multiculturalism must include both difference and sameness perspectives. Five books obtained from a recent web site titled Fifty Multicultural Books Every Child Should Know and presented in this essay attempt to embrace multiculturalism and pass it onto >the universal child=. Unfortunately, some of these books fall short of the

Inflation and the Economy

7838 words - 31 pages simultaneously as not all spheres of the economy can be equally supplied with currency, not even with inflated currency. Due to the issue restrictions at least local deflations tend to persist while other areas may suffer from an inflation or one proceeding at a faster rate because they are at the same time more thoroughly flooded with money. Think of the current example of starving private industry of funds (e.g. by deflating this

The Sea of Change: An Increase in Ocean Acidification

1695 words - 7 pages CO2 Now, carbon emissions have increased by 2.1% from 2011 to 2012; or 9.47 billion tons to 9.7 tons in just one year.(CO2 Now) This number is projected to increase at an even faster rate as the world becomes increasingly more populated and the demand for energy rises. Mankind’s reliance on fossil fuels as a primary source of energy is swiftly changing almost all of the Earth’s natural environments and processes. It is causing fluctuations in

The Negative Effects of an Economy Starving for More Money

1169 words - 5 pages results in a higher debt. If the loan that the bank hands out is not able to be paid back by the customer the bank will place an even higher interest rate so they will not lose money of the deal. If the economy can not keep up with the debt then the people will suffer. If debt is what the money system needs then there will never be a time where people are not chasing after it. If a person receives a loan they are obligated to pay it back and in

account for the increase in illgal downloading and discuss the effects of this trend

829 words - 4 pages Recently, Downloading films illegally has increased significantly . Nowadays, the number of people who download films is increasing for many reasons. One of the issues that should be considered and deterred in our societies is illegal downloading because it affects many aspects in this trend. This essay will focus on the reasons and it will contain a discussion about the effects of the increase in illegal downloading. Moreover, this essay is

How might the death penalty prevent crime? Discuss in an essay

1323 words - 5 pages The Death Penalty: How does it affect crime?The death penalty is a major issue that brings up a lot of controversy in our society. The most important question concerning the death penalty is whether it should be abolished or not. Many people think that the death penalty is the ultimate denial of human rights and that it also violates the right to life. Some say it is cruel, inhumane, and a degrading type of punishment. Other people are for it

Similar Essays

Increase In Illegal Workers Reduces Wages, And Increases The Burden On Social Services. Supply And Demand; Labor Markets; Income Distribution And Poverty

656 words - 3 pages Subject: increase in illegal workers reduces wages, and increases the burden on social servicesTopic: Supply and Demand; Labor Markets; Income Distribution and PovertyKey Words: Illegal Immigration, Labor Market, Poverty, Hispanics, RegulationNews StorySince September 11, 2001, U.S. border patrols have increased significantly. Patrols have increased so much that the cost to cross illegally from Mexico into the US has increased to about $1,500

Distinguish Between An Extension And A Contraction And An Increase And A Decrease In Supply And Demand. What Factors May Cause Such Changes?

799 words - 3 pages invents a better way of growing wheat so that the amount of wheat that can be grown for a given cost will increase. Producers will be willing to supply more wheat at every price and this shifts the supply curve S0 to the right, to S1 - an increase in supply which has caused an extension in demand. This causes the equilibrium price to decrease from P0 to P1. The equilibrium quantity increases from Q0 to Q1 as the quantity demanded increases at

The Realtionship Between Money Supply And Inflation: Regression Analysis With Time Lags

3788 words - 15 pages ) + 0.163089682*X5 (GDP)The coefficient of X1 implies that 1% increase in money supply causes increase of 0.043675713 in inflation rate, under the condition of keeping the rest of the explanatory variables constant. Correspondingly, the coefficient for wages clarifies that 1% raise in the independent variable increases the dependent variable by 0.538611282. As well, 1% increase in unemployment results in 0.059919334 boost in inflation rate. Then, 1

Japan’s Annual Money Supply Growth Rate

806 words - 3 pages fact been experiencing inflation. The Bank of Japan increased its annual inflation rate to 1.8% from 1.1%. Japan will increase in consumer prices (goods and services) which should lead to higher company profits and wages, and domestic spending in the economy. Japan’s increase is mainly imported and increasing food and energy prices. Japan is an importer of goods and Japanese companies are not benefitting from this inflationary environment. In