This paper talks about the role of the total aggregate money supply management in the achieving of twin targets of growth and price control. There is a discussion of the relationship between money supply and inflation in the paper and the effects of the increase in money supply on the inflation. …
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However, when the government securities are purchased from the market, central bank actually inject money into the market thus increasing the money supply in the economy. (Mankiw, 2008) Another important method through which money supply can be controlled in the economy is the adjustment in the discount rate. Discount rate is the interest rate at which central bank lends to other banks and is also serves as the primary rate in any economy. When discount rate is increased, central bank therefore invariably makes it difficult for the households and firms to obtain the obtain money at relatively cheaper rates thus making borrowing costly. A decrease in the discount rates otherwise because by reducing the rate, central bank makes it easier for the firms and the households to borrow money easily. (Sloman, & Garratt.2010). Inflation and money supply Inflation is an increase in the general price level in the economy and signifies a reduction in the purchasing power of the money. Normally inflation is measured through a consumer price index where the prices of a fixed basket of goods and services are compared with the prices of the same basket of goods and services at a give base year. An increase in the prices as compared to the base year therefore is considered as an increase in the inflation and hence erosion in the purchasing power of money. A decrease in the purchasing power would mean money would buy fewer things. (Krugman & Wells, 2009) According to the classical economics, an increase in the money supply actually does not result into an equal increase in the aggregate demand for goods and services. As such any change in the money supply will...
This paper outlines the relationship between aggregate money supply and the growth of the real GDP and overall level of prices in the economy.
One of the central debates in monetary economics rests upon the neutrality of money and whether money can actually result into the development of price increase or not. This debate is also based on the notion that the central bank of a country actually does not have any role in contributing towards the economic growth because money actually remains neutral and does not result into the growth. Moreover, it is argued that the higher money supply can result into higher prices and thus if money supply is increased, it will create inflation in the economy and will hurt the real economic growth. This is because of the fact that higher inflation level decreases the purchasing power of money quickly.
In order to achieve objectives of the economic growth and price stability, central bank adapts different tools and techniques which help it to control the money supply in the economy. One of the most commonly used methods is the open market operations under which central bank actually purchases or sells the government securities in the market. Another important method through which money supply can be controlled in the economy is the adjustment in the discount rate.
According to the classical economics, an increase in the money supply actually does not result into an equal increase in the aggregate demand for goods and services. Classical economists also argue in such situation an increase in the money supply would result into inflation.
At the full equilibrium level, a positive change in the money supply would result into inflation and the negative growth rates.
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(Relationship Between Money Supply and the Inflation Essay)
“Relationship Between Money Supply and the Inflation Essay”, n.d. https://studentshare.org/macro-microeconomics/1410935-relationship-between-money-supply-and-the-inflation.
To give us a better understanding about the relationship between money supply and inflation, it is necessary for us to know what inflation means. In line with this, explained that high inflation rate is referring to an economic situation wherein the money supply is greater than the economic growth.
The basic understanding is that with inflation comes erosion of buying power of a specific currency. In simple terms consumers are required to use more money to purchase the same commodity. This paper is based on the suggestion that there is a link between the amount of money circulating in an economy i.e.
According to most economists, there is a very strong relationship between the supply of money and extent of inflation. However, the relationship can not be easily predicted because of the influence and role of many other factors in addition to money supply in causing inflation.
The perception that growth of money is entirely not relevant for inflation is quite surprising. One of the ancient and most held economics propositions is the idea which suggests that persistent variations in level of prices are directly linked with money supply.
According to the author, the economic variables that are commonly stationary not in levels but in the initial distinctions; this usually calls for the application of the Augmented- Dickey Fuller test which offers the assurance that the likelihood organization of the variables are steady for consequential regression expression.
Economists have found many divergent observations in their empirical analyses. There is a non-uniform evidence of the relationship between money supply, inflation and economic growth among countries. The pattern of relationship is uni-directional in some cases and bi-directional in others.
In the first part of the paper, the term inflation is defined, its causes are discussed, its measurement techniques and how one combat with it are also discussed. In the second part of the paper, we have moved towards the more realistic approach. The data is extracted from the various reports and researches and it is refined through tools such econometric regression to determine the correlation between the two variables, that are inflation and money supply.
Earlier, silver and gold served as money. Now that this commodity money gave way to paper currency and deposits, these monies were treated as fiat money which allowed the national monetary institutions to exercise their power to use them without any legal constraints.
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