Money supply and inflation relationship

The link between Money Supply and Inflation | Economics Help

money supply and inflation relationship

How are the money supply and inflation related? And what does the Federal Reserve have to do with this relationship? Episode 1 of the Feducation Video. Monetary inflation is a sustained increase in the money supply of a country (or currency area). variables, such as the productive capacity of the economy, there is a direct relationship between the growth of the money supply and inflation. In the long term, the size of the money supply is proportional to the price level. The Quantity theory of money is really the only explanation of why a gallon of milk .

If the money supply increases at the same rate as real output, then prices will stay the same. WIth the money supply increasing faster than output, there is a rise in nominal demand.

In response to this rise in demand, firms put up prices and we get inflation. Examples of increased money supply causing inflation This link between the money supply and inflation can be seen in many historical cases. In the aftermath of the First World War, Germany faced high reparation payments. To meet these demands, the government started printing more money — so that firms could continue to pay workers.

This led to an explosion in the inflation rate. By the end ofprinting money had got out of hand, and the economy experienced hyperinflation. Zimbabwe found itself in a similar situation.

Quantity Theory of Money

High government debt, falling output and a need to print money to stave off a short-term crisis. Why increasing the money supply does not always cause inflation 1.

In other words, the growth of money supply is absorbed in the increase in real output. Hard to Measure Money Supply.

Monetary inflation - Wikipedia

Sometimes the money supply is hard to calculate and is constantly changing. Large increases in the money supply are often just due to changes in the way people hold money. For example, an increase in credit card use may cause an increase in th broad money supply M4. However, this assumes that V velocity of circulation is constant and Y is constant.

The network output is computed for a defined number of steps above and below the mean. This process is repeated for each input. As a result, the variation of output with respect to the variation in each input is found.

money supply and inflation relationship

Correlation coefficient for training data and testing data are 0. This means that generalization capacity of the model is almost perfect, but the performance of the model is reasonably good.

Comparison of the model results versus the actual values are shown in Fig. Performance results of the model Table 2: Sensitivity results of the model In Fig. Mean-squared error term for training data and testing data are 1. Summary results of the sensitivity analysis, given in Table 2 and Fig. The reaction of the inflation to different input variations for each input are illustrated in Fig. As shown in Fig.

While seasonal dummy value increases, inflation rate gradually decreases from autumn to summer Fig. Comparison of the model results versus the training data Fig. Comparison of the model results of testing data Fig.

money supply and inflation relationship

Sensitivity results of the model Fig. Network inflation rate for varied previous inflation rates P t-1 Fig. Network inflation rate for varied season S Fig.

The link between Money Supply and Inflation

Network inflation rate for varied money supply M t-1 Fig. Inflation rate of previous month is the second significant input variable in order of sensitivity. This autoregressive inflation term has a significant influence on inflation rate. Money supply growth rate of previous month is the third significant variable relatively other input variables in the model. Money supply growth has a positive relationship to inflation Fig.

money supply and inflation relationship

If we ignore the seasonal dummy variable, money supply significantly improves the forecasting capabilities of the model. The least significant input variable is the time trend. The dummy input variable time has an inverse relationship to inflation Fig. The variance of the time variable explains only a small portion of the variance in inflation. From start of the sample period to end, inflation gradually decreases.

money supply and inflation relationship