According to the monetarists, inflation is caused by

According to the monetarists, inflation is caused by

by

According to the monetarists, inflation is caused by

    1. Supply shocks
    2. Expansionary fiscal policies
    3. Expansionary monetary policies
    4. Government regulations

 Correct Answer: Expansionary monetary policies

Answer Explanation

Monetarists are those who follow the economic theory associated with monetarism. They believe that central banks’ expansionary monetary policies are the primary cause of inflation. A central feature of monetary theory is the relationship between the money supply and inflation, which is often associated with economist Milton Friedman. Monetarists believe inflation is a monetary phenomenon that is driven by a change in money supply that exceeds real output growth.

An expansionary monetary policy involves increasing the amount of money in an economy. By lowering interest rates, reducing reserve requirements for commercial banks, or engaging in open market operations to purchase government securities, we can achieve this. Economic activity, borrowing and spending, and investment are the ultimate goals of such policies.

The monetarists argue that when the money supply increases faster than economic output, it leads to an excess of money circulating in the economy. This excess of money causes prices to rise as aggregate demand increases.

It is often summarized in the equation of exchange, where the quantity of money (M) times the velocity of money (V) equals the price level (P) times the level of transactions (T), or MV = PT.

When the money supply grows more rapidly than the real output of goods and services (T), it can lead to an increase in the price level (P), resulting in inflation. According to monetarists, sustained inflation is ultimately a monetary phenomenon that results from excessive money creation. And it stays as a long-term link exists between money supply growth and inflation.

Why the other options are not correct

a. Supply Shocks

A supply shock is a sudden and unexpected change in the availability of key inputs or resources that affects production. It is true that supply shocks can impact price levels and contribute to short-term fluctuations in inflation. But monetarists emphasize they are not the primary cause of sustained inflation. Rather, monetarists argue that supply shocks are temporary and can be addressed by appropriate monetary policy measures.

b. Expansionary fiscal policies:

An expansionary fiscal policy involves government initiatives to stimulate economic activity, such as increasing public spending or reducing taxes. Monetarists argue that these policies can have a short-term effect on demand, but they are limited and often transitory when it comes to inflation.

Monetarists believe that inflation is driven by the growth of the money supply, not fiscal policies, which, while influential in shaping economic activity, do not directly cause persistent inflation.

d. Government Regulations:

Monetarists maintain that government regulations are not the primary cause of inflation. Although they can certainly affect economic activity and market behavior. According to monetary theory, inflation is primarily caused by the money supply. With government regulations considered secondary effects that may influence the broader economy, but are not the primary cause.

Conclusion

In the monetarist view, inflation is caused primarily by expansionary monetary policies, which result in a higher money supply than real output. Ultimately, sustained inflation is a monetary phenomenon, as this perspective emphasizes the fundamental relationship between money supply and price level.Other factors, such as supply shocks, fiscal policies, and government regulations, can affect inflation in the short term. But monetarists believe managing money supply growth is crucial to controlling inflation.

Which of the following measure is adopted to reduce inflation?

Bibisha Shiwakoti
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