Question

With the aid of a well labelled diagram, carefully explain the impact on the

money market if there was a discovery of gold that fuels inflation.

Answer 1

Solution:

Inflation refers to a sustained increase in prices and a fall in the purchasing value of money. Inflation shrinks the buying capacity of currency and savings. An increase in the price level results in an increase in the demand for money and an increase in the money supply.

 

This is depicted by the below graph: