How does the money supply affect inflation and deflation?
Rising inflation directly doesn't lead to increase in india's GDP, Rather it leads too increase in nominal GDP of the country which is calculated at current year prices of final goods and services, that neans inflation leads to increase in nominal GDP even if the productivity of the country is stagnRead more
Rising inflation directly doesn’t lead to increase in india’s GDP,
Rather it leads too increase in nominal GDP of the country which is calculated at current year prices of final goods and services, that neans inflation leads to increase in nominal GDP even if the productivity of the country is stagnent
Which makes Nominal GDP of a country as an illusionary indicator of growth in an economy while real indicator is increase in Real GDP which is calculated at base year prices (unaffected by inflation)
Infact sometimes Increase in Nominal GDP of a country results in negetive growth in following ways
1. Increase in cost of production
As a result of increase in general price levels producers would face increase in cost of production, This leads to lower profit margins which makes the producers difficult to survive
2 Lower consumer spending in long term
Rise in general price levels leads to decrease in purchasing power of consumer if income doesn’t increase proportionately, as a result consumer tends to reduce the consumption
3. Rise in interest rates
To curb the inflation RBI mmay increase the interest rates, so that it makes costly to consumer to borrow and it tends to lower the consumer spending
4. Economic unstability
Inflation leads to uncertainty in economy which makes it difficult to make decisions for consumers as well as producers which results in. Economic unstability
GOVERNMENT can take necessary steps to curb the inflation through fiscal policy so as to reduce uncertainty in market by
• Increasing taxes on income to reduce the purchasing power of consumers
• decresing govt spending or investments
• borrowing more from public to reduce the money supply in markets
Through monitery policy by
• increase in repo rates or reverse repo rates
• controlling open market operations
• increasing interest rates etc
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The money supply in the making of inflation and deflation as well. Of course such factors are used to determine the level of prices in an economy. With this money supply there is more liquidity in the consumption and the production processes. As is evident from the Quantity Theory of Money MVRead more
The money supply in the making of inflation and deflation as well. Of course such factors are used to determine the level of prices in an economy.
With this money supply there is more liquidity in the consumption and the production processes. As is evident from the Quantity Theory of Money MV = PQ an increase in the stock of money ‘M’, at a constant velocity ‘V’, the resultant will be an increase in the price level ‘P’ with ‘Q’ constant. In a nutshell, yet more money is thrown after the same quantity of goods and services and demand goes further up and up goes the prices and inflation.
But with most instruments, a central bank also increases money stock through open market operations, reducing interest rates to encourage even higher consumption and investment to bring in easy, demand-led inflation.
This is because when money supply is reduced more money is left in the central bank than circulating in the economic market reducing the consumers’ expenditure and businesses investment thereby lowering the aggregate demand hence deflation. Because price level has a tendency to go down as time goes on; low demand consequently reduces the price level hence deflation.
Aggressive deflation would be a bane to the corporate revenues and also send the economy into stagnation because the consumers wait for cheaper products to be released
Corev, more central banks monitor this money supply and adjustment to a middle position is done to control inflation and avoid both deflationism and inflationism for economy steadiness.
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