The main reason why money supply is classified into various measures on the basis of its functions is that effective predictions can be made about the likely effects on the economy of changes in the different components of money supply.
As aggregate demand curve shifts to AD2, price level rises to OP2. Lastly, an important noteworthy point is that though money multiplier does not show much variation in the long run, it can change significantly in the short run causing large variations in money supply.
Additionally, AE is reduced by net exports. This depreciation of rupee will make our imports costlier which will tend to raise inflation if not matched by fall in international commodity prices.
This causes aggregate supply curve to shift leftward. One may also argue that inflation creates an air of uncertainty in the minds of business community, particularly when the rate of inflation fluctuates.
Now take the opposite case of surplus in current account balance i. Inflation may or may not result in higher output. The problem is that the velocity of circulation is falling faster than the Fed can increase the monetary base.
Black marketeers are also benefited by inflation. The negatively sloped aggregate demand AD curve can be derived from this relationship, showing that an increase of the price level reduces income.
Salaried People and Wage-Earners: Inefficiency, corruption, mismanagement of the economy may also be the other reasons. Time deposits are money that people hold as store of value.
Trade unions demand higher money wages as a compensation against inflationary price rise. However, under flexible rate system, if RBI does not intervene, the deficit in overall balance of payments will cause rupee to depreciate. However, since loans from the banks can be easily obtained against these time deposits, they can be used if found necessary for transaction purposes in this way.
No, if the money supply does increase too much, then it will cause inflation. In the other deposits with Reserve Bank of India i. In contrast, money multiplier takes into account these leakages of currency from the banking system and therefore measures actual increase in money supply when the cash reserves with the banks increase.
Mild inflation has an encouraging effect on national output. In order to arrive at the total currency with the public in India we add the following items: Purchasing power and, hence, aggregate demand, may also go up if government repays public debt.
However, if borrower of bank A withdraws Rs. Thus, to ensure internal balance requires that money supply should not be allowed to increase much. A wage-price spiral comes into operation.See more at Keynesian economics Monetarism emphasis’s the importance of controlling the money supply to control inflation.
Monetarists are generally critical of expansionary fiscal policy arguing that it will cause just inflation or crowding out and therefore not help. Causes Inflation – Inflation is caused by excess demand in the economy, a rise in costs of production, rapid growth in the money supply.
Costs of Inflation – Inflation causes decline in value of savings, uncertainty, confusion and can lead to lower investment. Determinants of inflation in Tanzania Samuel A.
Laryea and Ussif Rashid Sumaila WP Determinants of inflation government control became the dominant economic strategy with the ultimate aim of variables such as the money supply and real output.
The paper is. Inflation and the Distribution of Relative Prices: The Role of Productivity and Money Supply Shocks William D.
Lastrapes Journal of Money, Credit, and Banking, Volume 38, Number 8, December. The link between Money Supply, inflation and National Output has become increasingly tenuous over recent years Velocity of Circulation.
Money Supply doesn't just depend on the amount of money. money supply, interest rate and exchange rate on inflation in Bangladesh. Literature Review B. Fatukasi,() shows the determinant of inflation in Nigeria using the data between and This shows that fiscal deficit, money supply, interest rate and exchange rate positively influence over inflation in Bangladesh.Download