Inflation Theories - Inflation and Money - The role of the money supply?

Many economists argue that one of the main causes of inflation is excessive money supply growth. The origins of this theory lie with Monetarist economists. Perhaps the best known Monetarist is Milton Friedman, and much of the research on this theory was done by him at Chicago University.

This theory of inflation draws on the Quantity Theory of Money to suggest that if the amount of money in the economy grows faster than the growth in the level of potential output, then this will feed through to prices. In other words if the money supply grows too fast there will be inflation.

For much more detail on Monetarists and the 'Quantity Theory of Money', either follow the links above or go to the Library (3rd floor) of the Virtual Economy. You can also access this from the top navigation bar or the side panel.