Money supply and price level relationship memes

The Fed has the power to adjust the money supply by increasing or decreasing the If the average price level is high and goods and services tend to cost a. Easy Money –Increases growth (good) –Increases inflation (bad) Tight 30 Determining Nominal Interest Rates MS MD Rate of interest, i Quantity Money ieie MeMe 34 Graph Relationships i Money Market M MD MS Investment Demand i I I. explain how money helps to promote a positive relation between citizens “ productivity,” “supply and demand,” and, especially, “money. . With respect to money, the conservatives emphasize “fiscal discipline” and “inflation.

Innovation Memes: The IS-LM Macroeconomic Model

To meet these demands, the government started printing more money — so that firms could continue to pay workers. This led to an explosion in the inflation rate. By the end ofprinting money had got out of hand, and the economy experienced hyperinflation.

Zimbabwe found itself in a similar situation. High government debt, falling output and a need to print money to stave off a short-term crisis. Why increasing the money supply does not always cause inflation 1.

Value of Money and the Price Level (With Diagram)

In other words, the growth of money supply is absorbed in the increase in real output. Hard to Measure Money Supply. Sometimes the money supply is hard to calculate and is constantly changing.

Large increases in the money supply are often just due to changes in the way people hold money. For example, an increase in credit card use may cause an increase in th broad money supply M4.

However, this assumes that V velocity of circulation is constant and Y is constant. However, in practice, it is not as simple as this equation assumes. There are often variations in the velocity of circulation.

The link between Money Supply and Inflation

This explains why quantitative easing increasing the money supply did not cause inflation between and Keynesian view — Liquidity Trap In a recession, there is spare capacity in the economy. Therefore, an increase in the money supply, merely helps to get unemployed resources used in the general economy.

When the quantity of money in circulation in a country is increased e. Conversely, if the supply of money decreases people can buy less and the price level tends to go down. Again, if there is an increase in the supply of goods and services, the price level tends to fall and, in the converse case, it tends to rise.

There are other factors which influence the price level e. There was, at the same time, a decrease in the supply of goods due to reduction of imports, etc. Consequently, the price level increased many times. It is possible to analyse the causes of price changes in a different way. Modern writers believe that price level changes are brought about by changes in the level of income, i.

When income falls, less goods and services are demanded and price fall. When inflation is reduced to its simplest elements, its proximate causes can easily be identified. Let us assume for a moment that the value of the consumable goods and services produced is in balance with the money paid to all those who compete for the purchase of the goods and services.

Value of Money and the Price Level (With Diagram)

Then prices will remain unchanged. Of course, prices of individual items will fluctuate due to changes in demand and supply conditions, but the aggregate price level will be stable. In fact, the inflation machine is nothing more than or less than a broad view of supply and demand and the market clearing price.

Now, if we load the left hand side of the inflation machine with more money than the value of goods and services on the right side, prices will surely increase.