ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The quantity theory of money states that the value of money is based on the amount of money in the economy. Thus, according to the quantity theory of money, when the Fed increases the money supply, the value of money falls and the price level increases.

Detailed explanation-2: -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-3: -A larger money supply lowers market interest rates, making it less expensive for consumers to borrow. Conversely, smaller money supplies tend to raise market interest rates, making it pricier for consumers to take out a loan.

Detailed explanation-4: -Conclusion: Supply of money and inflation are positively co-related to each other. If supply of money increases in an economy and production/ supply of goods/ services do not follow it, then inflation increases inevitably.