What is the relationship between money supply and inflation?

Inflation concerns the permanent increase in prices of goods and services. If inflation occurs, the purchase value of the currency unit erodes, which means that the person needs more money to buy the same product. Most economists suggest that there is a direct relationship between the amount of money in the economy known as money supply and the level of inflation. Understanding the relationship between money supply and inflation is far from easy or predictable, as inflation can easily be influenced by other factors.

cash and inflation are connected because high amounts of money usually concern demand for money. Imagine that everyone in a small town won $ 50 (USD) in a month. These people may have paid $ 10 per week for gasoline, but because their increase was essential, it would probably not bother to pay $ 11 per week, because it is still in proportion to less than what they had paid before. So sometimes the money between money supply and inflation begins when the market can carry higher prices, forAs the money supply increased, yet the consumer cannot buy a product at a price that was before inflation because the purchasing power of the currency erode.

The relationship between money supply and inflation is explained differently depending on the type of economic theory used. In the amount of money theory, also called monetarism, the relationship is expressed as MV = PT or cash supply x speed of money = price level transaction x. Speed ​​and transactions are considered constants, so they have a direct relationship according to this explanation and prices. In Keynesian theory, although there is still a relationship between money supply and inflation, it is not the only big factor that can affect inflation and prices. Cuineresian theory generally emphasizes sessionship between overall or aggregated demand and inflation changes.

changes in cash supply are often used to try to check inflation conditions. When the region tryIt reduces inflation, central banks generally reduce loan rates and increase interest. When inflation falls below the target level, these standards are generally released in an effort to stimulate the economy. The country usually uses the federal banking system to determine loans and interest limits on the basis of economic data.

Increasing the unconditional cash supplies can sometimes lead to a state called Hyperinflation . This occurs when inflation in a short period of time jumps extremely high, although the exact definitions are somewhat variable. Economists often say hyperinflation occurs when inflation jumps by 50% per month, but other estimates are also used. Money supply and hyperinflation are connected because the condition may result from sudden massive pouring money into the economy without the association of production or availability of goods. If in the first example, the inhabitants of the burghers received an increase in $ 500 per month, then the gas price could multiply many times at once, which caused an extremely high level of inflamce.