\"Inflation is always and everywhere a monetary phenomenon in the sense that it
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Question
"Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output".
Or so said Milton Friedman, who won the 1976 Nobel Prize for economics, in large part, due to his reasoning on inflation. Dr Friedman taught for thirty years at the University of Chicago, where his thinking took root.
Friedman is saying that if the supply of money 'gets ahead' of the real GDP, then prices will have to rise. On the other hand, if the money supply lags the real GDP, then we get deflation, as we did leading up to the Great Depression.
As we know, if people expect prices to be lower, later, they stop buying now. This produced a 25% rate of unemployment, in 1933.
Once, all money was defined in terms of gold. Gold is fairly fixed in quantity, so under gold standard, prices really couldn't rise, they could only fall, as real GDP grew.
Note that demand, unemployment, gov't spending, and all the other things we associate with inflation are absent from this reasoning. Only the supply of mony counts.
Do you agree with Dr. Friedman, that noting except the supply of money causes prices to change? If not, why not?
https://en.wikipedia.org/wiki/Milton_Friedman
Explanation / Answer
There are various demand side factors which also causes inflation in the economy. These factors include rise in the level of income of the individuals in the economy. They will demand more as consumption will rise and thus prices will rise. Also, increase in government spending will also raise the level of aggregate demand in the economy. Rise in the level of investment due to optimistic expectations of the producers will aos raise the level aggregate demand in the economy. Rise in the level of exports will reduce the amount available for the domestic consumers and thus will lead to inflation.
Thus, apart form money supply there are various factors that influence price level of the economy.
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