There are various other demand side factors which also cause inflation in an eco

Question

There are various other demand side factors which also cause inflation in an economy. These factors include rise in the level of income of the individuals in the economy.They will demand more as consumption will rise thus prices will rise. Also, increase in goverment 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 also raise level of aggregate demand. Rise in the level of exports will reduce the amount available for domestic consumers and thus lead to inflation.

Above was my post, below was the teachers response/question for me

How can incomes increase, or gov't spending increase, if they're no new money to do either ? Doesn't the money have to exist first, before either or these two things can happen?

Explanation / Answer

The economy of any country is based on a unique formula which is C+I+G+(ex-im). This determines the money flow in the economy. The G i.e government spending is an important tool in the hands of the government to control the money supply in the economy without printing new money. This is taken care by contractionery or expansionary monetary policy which the government undertakes inorder to take care of the monetary supply. Printing more money is not the solution since this will unnecessary increase the money supply which will lead to unnecessary inflation and the investors in the country might not trust the country any more. So the government will make use of open market policies. This policy controls the money supply which in turn affects the income of the people.

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