Examining the Relationship Between Inflation and Increase in Money.
Milton Friedman opined that inflation is always a monetary problem. It arises from a rapid expansion of the quantities of money more than the overall output. (Totonchi, 2011). This formed the simple quantity theory of money. The theory asserts that the general circulation of money impacts general prices. The subject of inflation has given rise to heated debates in the economic forums. Many scholars have raised ranges of conventional views. The discussions differ in hypotheses raised by different scholars. In a sense, inflation in developing countries is different from the one in developed countries. In developed countries, inflation is caused by the growth of the money supply. In contrast, inflation in developing countries is widely attributed to monetary phenomenal and fiscal imbalances. The issues addressed in this paper asserts why inflation increases with the rapid growth of the money supply.
Inflation is caused by increasing the money supply beyond the overall output growth. This leads to a situation where there is more money chasing a similar quantity of goods. As a result, firms tend to raise prices due to an increase in monetary demand. Lower interest rates are the leading cause of causing an increase in monetary supply. Increased interest rate leads to depositors to switch money from switch accounts into time accounts, a phenomenon that decreases the liquidity ratio of banks. This ensures a controlled flow of money in the economy. However, reduced interest rates create an opposite scenario leading to inflation.
Overly, inflation is a situation where there is a surplus flow of money in the economy. Usually, this money has little economic value. The firms typically have their prices increased, leading to the reduced monetary value of the circulating money. Reduced interest rate is the leading cause of inflation. As such, banks need to have harmonized interest rates to ensure less inflation.
Reference
Totonchi, J. (2011). Macroeconomic theories of inflation. In International Conference on Economics and Finance Research (págs. 459-462). Singapore: IACSIT Press.