GROUP 5

“MONEY GROWTH AND INFLATION”

MEMBERS:

EL-FAKHARANY, MAI
ALINSASAGUIN, PRECIOUS MAY
ARANGOSO, MARY ROSE
REQUILLOS, MARIZ
NEONES, CHRISTANGEL

YEAR & COURSE/SECTION: 2ND YEAR & BSA/AS-2

 “MONEY GROWTH AND INFLATION”

WHAT IS MONEY GROWTH?

Usually happens during an expansionary period when the government lowers the
interest rate, boosting aggregate demand through consumption and investment
spending. This, in turn, causes inflation in the economy to increase. money growth has
only temporary short-run effects on the economy, but it does not affect the real long-run
value of money. That is because an increase in money supply increases the price level,
which keeps the real value of money constant. So, when there's an increase in money
growth there's an increase of inflation but if decrease in money growth there will be a
deflation.
WHAT IS INFLATION?
Inflation is the rate of increase in prices over a given period of time. Inflation is
typically a broad measure, such as the overall increase in prices or the increase in the
cost of living in a country. The root cause of an increase in the prices of goods and
services often lies in the imbalance between supply and demand, key economic forces.
Supply, determined by businesses, denotes the production and sale of goods or
services. On the other hand, demand, driven by consumers, signifies the quantity of a
good or service purchased at a given price. When demand surpasses supply, an
increase in the prices of goods and services is likely to occur. Which is why you don't
usually see people saving money in cash for future benefits it is because as inflation will
rise the value of your savings will also be lowered hence why people tend to use their
money to buy assets like land, gold and etc.
WHY INFLATION RESULTS FROM RAPID GROWTH IN THE MONEY SUPPLY?
The money supply of a country is a major contributor to whether inflation occurs. As a
government evaluates economic conditions, price stability goals, and public
unemployment, it enacts specific monetary and fiscal policies to promote the long-term
well-being of its citizens. These monetary and fiscal policies may change the money
supply, and changes to the money supply may cause inflation.
Inflation can happen if the money supply grows faster than the economic output
under otherwise normal economic circumstances. Inflation, or the rate at which the
average price of goods or services increases over time, can also be affected by factors
beyond the money supply. The quantity theory believes that the value of money, and the
resulting inflation, is caused by the supply and demand of the currency.
There are situations where increases in the money supply do not cause inflation, and
other economic conditions like hyperinflation or deflation may occur instead. During
COVID-19, the Federal Reserve materially increased the nation's money supply. As a
result, the nation experienced higher-than-usual inflation. The Federal Reserve is
responsible for evaluating current market conditions and deciding whether to make
changes to the money supply.
The Fed makes changes to the money supply by lowering or raising the discount rate
banks pay on short-term loans. The Fed also buys or sells securities from banks to
increase or decrease the amount of money these banks have in reserves. When the
Fed increases the money supply faster than the economy is growing, inflation occurs. In
this situation, the increase in money circulating in an economy is higher than the
increase in goods produced. There is now more money chasing not as many goods in
this economy.
THE MEANING OF THE CLASSICAL DICHOTOMY AND MONETARY NEUTRALITY

THE CLASSICAL DICHOTOMY refers to the idea that real variables, like output and
employment, are independent of monetary variables.
NEUTRALITY OF MONEY is the idea that a change in the stock of money affects only
nominal variables in the economy such as prices, wages, and exchange rates, with no
effect on real variables, like employment, real GDP, and real consumption.
● Nominal variables are variables measured in monetary units.
● Real variables are variables measured in physical units.
● The irrelevance of monetary changes for real variables is called monetary neutrality
Velocity and the Quantity Equation
● The velocity of money refers to the speed at which the typical dollar bill travels around
the economy from wallet to wallet.
V = (P x Y)/M where:
V = velocity
P = the price level
Y = the quantity of output
M = the quantity of money
● Rewriting the equation gives the quantity equation: M x V = P x Y
● The quantity equation shows that an increase in the quantity of money in an economy
must be reflected in one of three other variables:
● The price level must rise, • the quantity of output must rise, or • the velocity of money
must fall.

HYPERINFLATION
- It refers to an economy's rapid, excessive, and uncontrollably rising general prices.
- It describes sudden, unchecked price increases in an
economy, usually at rates higher than fifty percent per
month over time.
Example:
• One of the more devastating and prolonged episodes
of hyperinflation occurred in the former Yugoslavia in
the 1990s. On the verge of national dissolution, the
country had already been experiencing inflation at rates
that exceeded 76% annually.
• Hungary experienced hyperinflation after World War
II. At the peak of Hungary's inflation, prices were rising
207% per day.
• In March 2007, Zimbabwe began its hyperinflation
period that reached a daily rate of inflation of 98% until
early 2009.
CAUSES OF HYPERINFLATION
• EXCESSIVE MONEY SUPPLY - If the money supply grows too big relative to the size
of an economy, the unit value of the currency diminishes; in other words, its purchasing
power falls and prices rise.
• DEMAND-PULL INFLATION - It occurs when aggregate demand in an economy is
more than aggregate supply. It involves inflation rising as real gross domestic product
rises and unemployment falls, as the economy moves along the Phillips curve. This is
commonly described as "too much money chasing too few goods".

• WHY SOME COUNTRIES PRINT SO MUCH MONEY THAT THEY EXPERIENCE

HYPERINFLATION?
- Hyperinflation starts when a country's government begins printing money to pay for its
spending. As it increases the money supply, prices rise as in regular inflation. An
increase in the money supply is one of the two causes of inflation.
- With too much money supply, prices also increase. Once the consumers realize what
of what is happening, they expect continued inflation. They spend more money to avoid
paying a higher price later. That excessive demand aggravates inflation. It's even worse
if they stockpile goods and create shortages.
EXPLAIN HOW INFLATION AND HYPERINFLATION RESULT FROM RAPID
GROWTH OF MONEY SUPPLY.
- Inflation will arise if the money supply expands more quickly than the rate of expansion
of the economy. Hyperinflation happens when there is an excessive disparity between
the expansion of the money supply and the growth of the economy.
INFLATION TAX
● When the government raises revenue by printing money, it is said to levy an inflation
tax.
● An inflation tax is like a tax on everyone who holds money
● The inflation ends when the government institutes fiscal reforms such as cuts in
government spending.
THE FISHER EFFECT
● REAL INTEREST RATE = NOMINAL INTERESTRATE - INFLATION RATE
● NOMINAL INTEREST RATE = REAL INTEREST RATE + INFLATION RATE
● REAL INTEREST RATE - is determined by saving
& investing in the loanable fund market.
● INFLATION RATE - determines money supply
growth
● so, this equation shows how NOMINAL
INTEREST RATE is determined.
DIFFERENCE BETWEEN INFLATION RATE AND INTEREST RATE
INFLATION RATE - This is the rate of increase in the general level of prices for goods
and services that results in a decline in buying power. Over time, a high rate of inflation
can devalue money and limit customers' capacity to purchase goods and services.
INTEREST RATE - This is the interest rate that borrowers pay lenders for the usage of
their money. The Bangko Sentral ng Philippines (BSP), the nation's central bank, sets
interest rates in the Philippines. Interest rates are an instrument of monetary policy that
the BSP uses to manage inflation and promote economic expansion. While higher
interest rates can reduce inflation but may also slow down economic activity, lower rates
might boost borrowing and expenditure.
The main difference between the two is that the interest rate affects borrowing costs and
economic activity, however the inflation rate estimates price increases and impacts
consumers' purchasing power.
INFLATION RATE IN THE PHILIPPINES
The National Economic and Development Authority (NEDA) reassured the public last
December as the nation's inflation rate reached its lowest point in 2023 that the
government is constantly keeping an eye on prices and inflation risks and putting
policies in place to safeguard Filipino households' purchasing power.
According to data released by the Philippine Statistics Authority, the average annual
inflation rate for the entire year dropped to 6.0 percent in December 2023, from 4.1
percent in November 2023.

THE COSTS OF INFLATION

● SHOE LEATHER COSTS - refer to the resources that are lost when people decide to
hold less money due to inflation.
● MENU COSTS - are the costs incurred while changing pricing.
● THE MISALLOCATION OF RESOURCES AND RELATIVE-PRICE VARIABILITY -
relative prices are distorted by inflation. Markets are less able to put resources to their
greatest use and consumer decisions are distorted.
● TAX DISTORTION - as inflation rises, capital gains become more substantial and are
subject to higher taxes. Capital gains are subject to a higher tax rate under progressive
taxation.

Types of Tax Distortions

1. Labor Market Distortions: Taxes on labor income can discourage work effort,
reduce labor supply, and create disincentives for individuals to improve their skills or
education. This can lead to a less productive workforce and lower economic growth.
2. Capital Market Distortions: Taxes on capital, such as corporate taxes or taxes on
capital gains, can discourage investment and savings. This can limit capital
accumulation, hinder business expansion, and hinder technological progress.
3. Consumption Distortions: Taxes on consumption, such as value-added taxes (VAT)
or sales taxes, can alter consumer behavior and distort market prices. They can lead to
changes in consumption patterns and affect the demand for goods and services.
● CONFUSION AND INCONVENIENCE - it lessens the usefulness of money as a unit
of account. Wealth is redistributed between lenders and borrowers as a result of
unexpected inflation.
● ARBITRARY WEALTH REDISTRIBUTION - it is from lenders to borrowers. Certain
individuals may benefit while others may suffer when inflation turns out to be different
from predictions.
REFERENCES:
● https://www.studysmarter.co.uk/explanations/macroeconomics/macroeconomic-
policy/money-growth-and-inflation/?fbclid=IwAR2hkYDJkuNUl-
NLCayp1F3sZiGVxxr8ZRKoBDvz8dgZDsaSdNj_qHLQhRw
● https://www.smallcase.com/learn/what-is-inflation/?fbclid=IwAR1fIVtArhKCk-
_46q2jM4v4HRIU-4zuqqAvojC0z__qIEfzt3JW7Z_9cSY#how-does-inflation-work
● https://www.investopedia.com/terms/h/hyperinflation.asp
● https://www.bria.com.ph/articles/what-is-the-impact-of-inflation-on-interest-rates/?
fbclid=IwAR1Pf7iNw9o1koHRf5Wemj9yQVVGuPkWc8kR80fZ2yZgq7ITDssBUCxt2gY#:
~:text=Central%20banks%2C%20such%20as%20the,fall%20when%20inflation%20is
%20low
● https://neda.gov.ph/ph-records-lowest-inflation-rate-in-2023-govt-to-continue-
measures-to-protect-filipino-purchasing-power-neda/?
fbclid=IwAR3sqi_63vVqtt9tXqwFoUenwQowhyIDbHdkpPa6ogKsTwKZg5aEYSC4pZc#:
~:text=The%20Philippine%20Statistics%20Authority%20reported,inflation%20rate
%20to%206.0%20percent
● https://www.studysmarter.co.uk/explanations/macroeconomics/economic-
performance/costs-of-inflation/?fbclid=IwAR1fIVtArhKCk-_46q2jM4v4HRIU-
4zuqqAvojC0z__qIEfzt3JW7Z_9cSY#:~:text=Cost%20of%20Inflation%3A%20Cost
%20of%20living%20goes%20up&text=But%20in%20the%20case%20that,their
%20taxes%20will%20go%20up