Take the 2-minute tour ×
Economics Stack Exchange is a question and answer site for economists and graduate-level economics students. It's 100% free, no registration required.

Some people believe that inflation is caused by an increase in the money supply when the banks print more notes engage in fractional reserve lending. Is this correct?

As I understand it, when there is more available money in the market, the price of goods will increase. But will a normal merchant acknowledge the increase of money supply and raise prices immediately? I posit that, in the short run, merchants won't increase prices in response to increased money supply.

So, why does increased money supply lead to price inflation?

Specifically, after the banks print more notes, where will the money be distributed first? Who will be the first one to have a need to rise their price? Does the enterprise borrow more money and spend more money in the market, and then the merchant increase their price when there are a lots of order?


migrated to money.stackexchange.com by Turukawa Apr 28 '12 at 17:09

This question belongs on our site for people who want to be financially literate.

The banks do not print money the Mints do. The federal reserve issues that money. Price inflation happens when the cost of raw materials, the cost of production, and/or the cost of distribution increases and the producer passes the costs on to the consumer. –  Chad Oct 18 '11 at 13:42
During the beta, it would be helpful if down voters would leave comments. I see 3 "off topic" votes, but I don't see how this question is off topic. It may not be "graduate" level, but it is a complex question that isn't always explained in macro 101. –  mehaase Oct 18 '11 at 23:35
Yes, I would also want to know whythe downvotes. –  gunbuster363 Oct 19 '11 at 1:18
Down votes are probably because of the factual errors within the question. Votes to close are probably because of the very basic nature of the question, which, at least for private beta, makes it off topic. –  Tal Fishman Oct 19 '11 at 1:20
@PatrickBeardmore there has been encouragement to close marginal questions during the private beta, hence the close votes. I opted to edit the question instead. I assume it will be more relaxed once the site goes public (if it were my question, I'd much rather have close votes than downvotes). –  Jason B Oct 19 '11 at 14:07

Browse other questions tagged or ask your own question.