Money Supply and Inflation Essay - 1724 Words

Money Supply plays an important role in macroeconomic analysis, especially in selecting an appropriate monetary and fiscal policy. Considerably, I am yet to come across theoretical work that has been done on this topic (analysis money supply and its impact on other variable i.e. inflation, interest rate, real GDP and nominal GDP). However some other topics similar to this one have been done by AL-SHARKAS, Adel, where he uses the same technique and models on the topic ‘out put response to shocks to interest rate, inflation and stock returns. His work investigates the relationship between the Jordanian output and other macroeconomics variables such as inflation, interest rate and stock returns. His paper employs the VAR approach method of†¦show more content†¦Business firms response to increase in sales by ordering more raw materials and increasing production. The spread of business activities increases the demand for labour and raises the demand for capital goods. In a buoyant economy prices rise and firms issue equity and debt. It the Money Supply continues to expand prices begin to rise; especially it out put growth reaches capacity limits. As the public begins to expect inflation, lenders insist on higher interest rates to offset an expected decline in purchasing power over the life f their loans. Thus there is relationship money supply and inflation (other macroeconomic variables like interest rates, real GDP and nominal GDP) and therefore when there is shocks in the money supply it does affect the those variables( Gujarat basic econometrics 004 4th ed). However, despite the importance of previous studies until now, the majority of research considers developed countries economies with regard to demand for money with out going further in to the relationship in less developed countries. This being the case the relationship in less developed, macroeconomic variables money supply and economic activity in developing countries still needs lengthy analysis and more research attention. The objective or purpose of this term paper is to show theShow MoreRelatedThe Effects Of Cash Reserve Ratio Reduction On Inflation, Money Supply, Employment Rates And Gross Domestic Product1977 Words   |  8 Pages2015 Spring Economics Assignment Question 1: Effects of Cash Reserve Ratio Reduction on Inflation, Money Supply, Employment Rates and Gross Domestic Product Regulators of financial matters and performance in a given country or region are often faced with the difficult task of ensuring that the performance of the economy is always positive. 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If the income of residents do not change, then the living standardRead MoreThe Inflation Definition And Influences1646 Words   |  7 Pages1.1 The inflation definition and influences Inflation is general defined as the devaluation of the currency with the comprehensive and continued rising price level, which means the purchase of money is persistent declining (James and Charles 1975). And this is generally considered as the result of the amount of money in circulation more than the actual needs of the economy. It will directly leads to the devaluation of paper money. If the income of residents do not change, then the living standard