Friday, 2 September 2011

What is the link between money and inflation?

Inflation occurs when the level of  money supply is increased, but the amount of products sold and made is not increased. So what you have is more money in the economy than is needed or being transacted through services and goods.
In the past inflation occurred when there was a crises such as crop failures  and war. During inflation the cost of products tend to become more expensive. Its a classic case of supply and demand an excess amount if the money in the system could be combated by a reduced increased demand for goods and more spending.
So in its current state historically economists have seen that the only way to reduce inflation is to increase productivity to match the excess money in the system which means producing more goods in that economy. Or simply stop printing or shrinking the available money supply.

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