Role of money supply in determinants of inflation economics essay

Essay on the Meaning of Inflation: Inflation and unemployment are the two most talked-about words in the contemporary society.

Role of money supply in determinants of inflation economics essay

Let us make in-depth study of the importance, concept, measurement, measures, determinants, factors determining, relation with budget deficit and effect of open economy of money supply. Importance of Money Supply: Growth of money supply is an important factor not only for acceleration of the process of economic development but also for the achievement of price stability in the economy.

There must be controlled expansion of money supply if the objective of development with stability is to be achieved. A healthy growth of an economy requires that there should be neither inflation nor deflation. Inflation is the greatest headache of a developing economy.

A mild inflation arising out of the creation of money by deficit financing may stimulate investment by raising profit expectations and extracting forced savings.

But a runaway inflation is highly detrimental to economic growth.

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The developing economies have to face the problem of inadequacy of resources in initial stages of development and it can make up this deficiency by deficit financing.

But it has to be kept strictly within safe limits. Thus, increase in money supply affects vitally the rate of economic growth. In fact, it is now regarded as a legitimate instrument of economic growth.

Kept within proper limits it can accelerate economic growth but exceeding of the limits will retard it. Thus, management of money supply is essential in the interest of steady economic growth. Concept of Money Supply and Its Measurement: By money supply we mean the total stock of monetary media of exchange available to a society for use in connection with the economic activity of the country.

According to the standard concept of money supply, it is composed of the following two elements: Currency with the public, 2.

Role of money supply in determinants of inflation economics essay

Demand deposits with the public. Before explaining these two components of money supply two things must be noted with regard to the money supply in the economy. First, the money supply refers to the total sum of money available to the public in the economy at a point of time.

That is, money supply is a stock concept in sharp contrast to the national income which is a flow representing the value of goods and services produced per unit of time, usually taken as a year. Secondly, money supply always refers to the amount of money held by the public.

In the term public are included households, firms and institutions other than banks and the government. The rationale behind considering money supply as held by the public is to separate the producers of money from those who use money to fulfill their various types of demand for money.

Since the Government and the banks produce or create money for the use by the public, the money cash reserves held by them are not used for transaction and speculative purposes and are excluded from the standard measures of money supply. This separation of producers of money from the users of money is important from the viewpoint of both monetary theory and policy.

Let us explain the two components of money supply at some length: Currency with the Public: In order to arrive at the total currency with the public in India we add the following items: Currency notes in circulation issued by the Reserve Bank of India.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. are able loan more money, which increases the overall supply of money in the economy.” Secondly, if the Fed lowers interest rates, then it will be less expensive to take out loans, which will lead to more business investment, which will create more jobs.2/5(1).

Exchange rate might have played a significant role in causing inflation in because of the introduction of flexible exchange rate regime since May A higher growth of money supply ( at to at ) added a lot to inflation in In the lending rate was which were lowered to in 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 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 . The Fed plays an integral role in the United States’ government and economy. Your group’s mission is to determine our (the Fed’s) role in the government, money supply, economic growth, and central banking.

Task #1 - Federal Reserve Video 1.

Money Supply: Importance, Concepts, Determinants and Everything Else