Relationship between money supply and inflation in saudi arabia - Essay Example

This paper also label the author from whose books or journals ideas are taken and they are labeled according to APA format. The topic about inflation and money supply in the economy was very vast. To prepare a good and comprehensive report, I have not only relied on my textbooks and knowledge, but instead I have used various outside sources as well. In the beginning, I have used some of the data that was published in Saudi Arabia Monetary Agency Report. This was a good mean to examine the overall inflation rate and monetary supply in KSA.

The report states that in order too keep the inflation rate in the country down; Saudi Arabian government keeps most of its wealth in the form of United States Dollars. This is to stop any unnecessary leakage or money being pumped into the economy. This shows that Saudi Arabian government knows about the fact that inflation in the economy will rise if they let the money flow into the economy. (SAMA 44th Annual Report, 2007) In another report it has also been suggested that Saudi Arabian government keeps the inflation rate down by offering various subsidies to their citizen.

As a part of this policy, in 2006, a heavy subsidy was given to automobile gas sector to cut down the prices by 20%. (Country Profiles Report, 2006)My research was not only limited only to these reports, but I tried to crack down the trend of inflation in Saudi Arabia. It was when, I was researching about the inflation rates in Saudi Arabia, I found out that inflation hit Saudi Arabia in those periods, when oil-markets showed a boom or price of oil rose sharply in the international market. (Index Mundi)I also reviewed various text books to arrive at the correct definition of money supply.

In the end, I found these definitions very appropriate. One writer stated that money supply is actually the amount of money that is cumulatively held by people and organization working in a country (Samuelson and Nordhaus, p.321)After finding the correct definition of money supply, I started looking for money-supply trends in Saudi Arabia. It was very surprising to see that in the last few years Saudi Arabia has increased the money supply in the economy and it is continuing its policy, although the fears about inflation are very high in the country.

(Country Profile Reports: KSA,2008)In a report, it was stated that "For the last few years, Saudi Arabian government is increasing the money supply in the economy by around 24% annually". Talking in the more absolute terms, the report further stated that "M3 (broadest measure of money supply as it includes all the money that is circulating in the economy in the form of Cash or Bank Deposits) grew to 815.14 billion riyals ($217.4 billion), which in the preceding year was only lingering around 615