ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -An increase in the money supply can lead to inflation if it outpaces the growth of the economy. This means that prices, wages, and input costs increase; though people have more money (or better access to money), the prices they pay will be higher.

Detailed explanation-2: -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-3: -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.

Detailed explanation-4: -Effect of Money Supply on the Economy 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.

Detailed explanation-5: -Expansionary Monetary Policy Graph Lower interest rates decrease the cost of borrowing money, which encourages consumers to increase spending on goods and services and businesses to invest in new equipment.