ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -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. The central bank’s currency is a liability of both the central bank and the government.

Detailed explanation-2: -Long-lasting episodes of high inflation are often the result of lax monetary policy. If the money supply grows too big relative to the size of an economy, the unit value of the currency diminishes; in other words, its purchasing power falls and prices rise.

Detailed explanation-3: -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.

Detailed explanation-4: -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-5: -Inflation reduces the purchasing power of the money. Inflation reduces unemployment. The price of goods and services become more expensive. An inflation rate of 2% to 3% is good for the economy but higher rates of inflation can be very bad for consumers and the economy of a nation.