ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The Ministry of Finance mints coins, but the RBI distributes them throughout the country. The rate of inflation in the economy is determined by the supply of money. When the supply of money in the economy increases, so does inflation, and vice versa.

Detailed explanation-2: -Inflation is caused when the money supply in an economy grows at faster rate than the economy’s ability to produce goods and services.

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: -Fall in the money supply A central bank may use a tighter monetary policy by increasing interest rates. Thus, people, instead of spending their money immediately, prefer to save more of it. In addition, increasing interest rates lead to higher borrowing costs, which also discourages spending in the economy.