ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -According to Quantity Theory: Inflation is caused when the rate of increase in the money supply is faster for example printing more notes than the growth of real output. Because there is more money pursuing the same quantity of commodities, this is the case.

Detailed explanation-2: -Thus greater the money supply, higher the price level and vice versa. Also, a change in money supply can bring about a change in prices. Hence if a country is facing high levels of inflation, reducing money supply would moderate inflation.

Detailed explanation-3: -An increase in the supply of money typically lowers interest rates, which in turn, generates more investment and puts more money in the hands of consumers, thereby stimulating spending. Businesses respond by ordering more raw materials and increasing production.

Detailed explanation-4: -Findings-It is found out that the continuous increase in the money supply causes inflation in the long-term, but the continuous increase in the money supply growth does not cause inflation in a short time, this was analyzed based on the theory of monetary quantity.

Detailed explanation-5: -More jobs and higher wages increase household incomes and lead to a rise in consumer spending, further increasing aggregate demand and the scope for firms to increase the prices of their goods and services. When this happens across a large number of businesses and sectors, this leads to an increase in inflation.