Answer to Question #93650 in Macroeconomics for Musbahu Ahmad Ibrahim

Question

Given inflationary expectations, explain and show why a reduction in the growth rate of money will lead to an inflationaty recession

Answer 1

Аn increase in the money supply is the cause of inflation. For example:

1. The growth of government spending, for the financing of which the state is resorting to money emission, increasing the money supply in excess of the needs of commodity circulation. Most pronounced during the war and crisis periods.

2. Excessive expansion of the money supply due to mass lending, and the financial resource for lending is taken not from savings, but from the issue of unsecured currency.

Аnd vice versa - a reduction in the money supply will lead to a decline in inflation. Money supply can be reduced by high taxes or high rates on bank long-term deposits, salary reduction.