Money supply and inflation relationship pdf creator

Phillips curve - Wikipedia

The aim of this paper is to shed further light on the relation between inflation . Money supply is therefore a key determinant of the inflation rate. .. Finally, special thanks go to my creator and guide, Allah (SWT), to whom I am ever grateful. the formulation and implementation of monetary policy by the Central Bank of . effects in the relationship between inflation and economic growth using a new . creator of investment and hence growth; and income distribution determines. Monetarism is a school of thought in monetary economics that emphasizes the role of governments in controlling the amount of money in circulation. Monetarist theory asserts that variations in the money supply have major The book attributed inflation to excess money supply generated by a central bank. It attributed.

However, Phillips' original curve described the behavior of money wages. They could tolerate a reasonably high rate of inflation as this would lead to lower unemployment — there would be a trade-off between inflation and unemployment. Moving along the Phillips curve, this would lead to a higher inflation rate, the cost of enjoying lower unemployment rates.

Some of this criticism is based on the United States' experience during the s, which had periods of high unemployment and high inflation at the same time. MundellRobert E. LucasMilton Friedmanand F. Theories based on the Phillips curve suggested that this could not happen, and the curve came under a concerted attack from a group of economists headed by Milton Friedman. In this he followed eight years after Samuelson and Solow [] who wrote "All of our discussion has been phrased in short-run terms, dealing with what might happen in the next few years.

It would be wrong, though, to think that our Figure 2 menu that related obtainable price and unemployment behavior will maintain its same shape in the longer run. What we do in a policy way during the next few years might cause it to shift in a definite way.

Unemployment would then begin to rise back to its previous level, but now with higher inflation rates. This result implies that over the longer-run there is no trade-off between inflation and unemployment. This implication is significant for practical reasons because it implies that central banks should not set unemployment targets below the natural rate.

Monetarism - Wikipedia

Work by George AkerlofWilliam Dickensand George Perry[13] implies that if inflation is reduced from two to zero percent, unemployment will be permanently increased by 1.

This is because workers generally have a higher tolerance for real wage cuts than nominal ones. For example, a worker will more likely accept a wage increase of two percent when inflation is three percent, than a wage cut of one percent when the inflation rate is zero. Today[ edit ] U. There is no single curve that will fit the data, but there are three rough aggregations——71, —84, and —92—each of which shows a general, downwards slope, but at three very different levels with the shifts occurring abruptly.

Wheat, for example, may rise in price either because there is an increase in the supply of money or a failure of the wheat crop. But we seldom find, even in conditions of total war, a general rise of prices caused by a general shortage of goods.

Even in the Germany ofafter prices had soared hundreds of billions of times, high officials and millions of Germans were blaming the whole thing on a general "shortage of goods" — at the very moment when foreigners were coming in and buying German goods with gold or their own currencies at prices lower than those of equivalent goods at home.

Similarly, the rise of prices in the United States since was attributed to a "shortage of goods", while official statistics have shown a rising industrial production.

Nor is a better explanation to say that the rise in prices in wartime is caused by a shortage in civilian goods. Even to the extent that civilian goods were really short in time of war, the shortage would not cause any substantial rise in prices if taxes took away as large a percentage of civilian income as rearmament took away of civilian goods.

If the price of oil goes up, and if people continue to use the same amount of oil as before, people will be forced to allocate more money to oil.

If people's money stock remains unchanged, less money is available for other goods and services, all other things being equal. This of course implies that the average price of other goods and services must come down.

The term "average" is used here in conceptual form. We are well aware that such an average cannot be computed. Note that the overall money spent on goods doesn't change; only the composition of spending has altered, with more on oil and less on other goods.

Hence the average price of goods or money per unit of good remains unchanged. Likewise, the rate of increase in the prices of goods and services in general is going to be constrained by the rate of growth of money supply, all other things being equal, and not by the rate of growth of the price of oil.

It is not possible for increases in the price of oil to set in motion a general increase in the prices of goods and services without corresponding support from the money supply. If it is fully financed by the sale of government bonds paid for out of real savings, it does not need to cause any inflation. Inflation can occur even with a budget surplus if there is an increase in the money supply notwithstanding.

And an increase in prices without an increase of cash in people's pockets would merely cause a falling off in sales. Wage and price rises, in brief, are usually a consequence of inflation. They can cause it only to the extent that they force an increase in the money supply.

Suppose that Joe Doakes and his merry men have invented a perfect counterfeit. In the first place, the aggregate money supply of the country would increase by the amount counterfeited; equally important, the new money will appear first in the hands of the counterfeiters themselves.

Counterfeiting, in short, involves a twofold process: David Humein order to demonstrate the inflationary and non-productive effect of paper money, in effect postulated what Rothbard called the "Angel Gabriel" model, in which the Angel, after hearing pleas for more money, magically doubled each person's stock of money overnight. In this case, the Angel Gabriel would be the "counterfeiter," albeit for benevolent motives. While everyone would be happy from their seeming doubling of monetary wealth, society would in no way be better off: As people rushed out and spent the new money, the only impact would be an approximate doubling of all prices, and the purchasing power of the money would be cut in half, with no social benefit being conferred.

An increase of money can only dilute the effectiveness of each unit of money. In real life, the very point of counterfeiting is to constitute a process of transmitting new money from one pocket to another.


Whether counterfeiting is in the form of making brass or plastic coins that simulate gold, or of printing paper money to look like that of the government, counterfeiting is always a process in which the counterfeiter gets the new money first. In short, the early receivers of the new money in this market chain of events gain at the expense of those who receive the money toward the end of the chain, and still worse losers are the people e.

Monetary inflation, then, acts as a hidden "tax" by which the early receivers expropriate gain at the expense of the late receivers. As the earliest receiver of the new money is the counterfeiter's gain is the greatest. Obviously, too, it is to the interest of the counterfeiters to distract attention from their own role by denouncing any and all other groups and institutions as responsible for the price inflation.