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Introduction
Inflation is a dangerous condition when peoples purchasing power declines because of rising prices. It can be increased by several causes: rising production costs, mass lending, and others. However, one of the most important reasons inflation may increase is the printing of money by a countrys central bank. In the case of the United States, it is the Federal Reserve. Central banks, including the Federal Reserve, may resort to printing more money to stimulate the economy; however, as mentioned above, such a strategy often results in inflation.
What is the money supply and how the Federal Reserve manages it?
The money supply is essentially the amount of money circulating in the market at a given time. In a crisis, the Federal Reserve may try to increase the money supply to maintain the economy. The institution does not have a printing machine to print massive amounts of money out of thin air because it is the responsibility of the Department of Treasury. There are twelve banks, known as Federal Reserve Banks, that are allowed to issue currency. However, the Federal Reserve may lower the federal funds rate or add credit to the accounts of federal banks, which increases the amount of money in supply.
Conclusion
Increased money supply may be the cause of increased inflation. Once peoples money increases, they are stimulated to invest or buy more goods. However, the amount of goods is still limited, so sellers start increasing the price. By saying that this happens with mathematical certainty, scholars mean that it is logical and, therefore, will certainly happen. In the worst cases, this situation may lead to uncontrolled growth of prices and hyperinflation. Therefore, even though the increase in the money supply might stimulate the economy, it is a dangerous strategy, and the Federal Reserve has to act with caution when implementing it.
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