Question

Assume a condition in which the economy is strong with high employment for one reason or another the money supply is increasing at a high rate with little evidence of it slowing down. Assuming the money supply continues to increase describe the evolving effect on prices

Answer 1

Assuming high employment and money supply increasing at a high rate, the following effects on prices can be expected:

• Inflation: As there is high employment and increasing money supply in the economy so there is purchasing power in the population. This will result in increased prices causing inflation.
• With increased money supply the demand for commodities will also increase. This will result in the demand for higher wages which will again result in an increase in prices of the commodities. This round will keep continuing and this is known as the wage-price spiral.