What is the effect of money on inflation?

The effect of money on inflation was the subject of a dispute between economists. Specifically, there is only a minor agreement on the short -term effects of slight changes in money supply. However, there are some links to which most economists agree. In the long run, the money supply tends to determine the level of inflation. Fast money production will cause hyperinflation or a very high level of inflation, even in the short term. Economists generally agree that the effect of money on inflation in the long run is very direct. When governments produce money faster than the rate of economic growth, each unit of the currency ends with a smaller part of the overall wealth of the economy. For example, if the economy grows by 20% over time, but the money supply increases by 30%, the currency unit will no longer have the purchasing power it has ever done. The amount of currency tends to lose its value, and this is the definition of inflation.

In addition, hyperinflation may occur when these effects are witnessed for a much shorter period. ForIt is assumed that hyperinflation is caused by a disproportionate increase in money supply. The hyperinflation rate is sometimes served in a month, a place per year. If hyperinflation occurs, consumers tend to not trust currency and try to transfer their money to tangible goods - which is an inflation problem even worse. The African country Zimbabwe began to experience hyperinflation at the beginning of 2000, and the depreciation of the Zimbabw dollar became so serious that the country had completely left the currency.

The shorter effect of inflation money is less clear. Some argue that the effect of money on inflation in the short term has long been similar to the effect. Others argue that other factors may have a significant effect.

The first view of the short -term effect of money on inflation is that it is also direct. This theory was supported by British economists Adam Smith and David Hume and American economist Milton Friedman. Because these economists believed that the amount of money was associated with inflation, even in the short term, their theory is often called the amount of money.The theory of the amount of money, in general, claims that the offer of money is directly proportional to the price level. Advocates of this theory often support a limited and controlled expansion of money inventory.

British economist John Maynard Keynes suggested that other factors in the economy can have a significant impact on short -term inflation. Keynes pointed out that the change in money offering only has an indirect effect on the general price levels and that intermediate products could therefore affect the final result. For example, even if the money supply could change, employers are reluctant to change their employees' salaries. Behavior, like this, can contribute to the short -term inflation rate.