Question

Will an increase in the money supply always increase inflation? Why or why not?

Answer 1

This statement is not true “Will an increase in the money supply always increase inflation?”

As we know that money supply will lead to increase in inflation if level of output or level of supply of goods & services does not increase in same proportion. In other words we can say that when output and supply remain same and money supply increase then it will lead to an increase in the inflation.

In opposite case when output level and supply also increase in same proportion as supply of money increase then there will be no increase in inflation.

Thus we can say that an increase in money supply does not always lead to an increase in inflation due to other factors such as level of output and level of supply of goods & services.