Question

Explain one tool that central bank can use to increase money supply that will not cause inflation.

Answer 1

Government can increase money supply without causing inflation by controlling prices through price ceilings. This way although the people have more money in their hands, the lower than market equilibrium prices reduces the amount of goods they can purchase. This way the prices remain the same although people have more money in their hands. But due to a shortage in supply people will have lesser to buy and will save more. The inflationary effect of money supply increase thus depends on the way the excess money supply is channelised in the economy.