Relationship between Money Supply and Inflation in Saudi Arabia Math Problem

Relationship between Money Supply and Inflation in Saudi Arabia - Math Problem Example Lucas (1995) has always put emphasis that there is a long run connection connecting money supply to prices of goods. Inflation and money supply cannot be separated and where there is inflation, there is monetary phenomenon. The increase in money supply is the root cause of increase in prices of commodities and this is what constitutes the central dogma of inflation.   Inflation has been categorized as either domestic or imported. This is because inflation may come as a result of increased cost of imports (high prices on imported goods) and services from within the country or due to the monetary exchange rates (Jackson & Miles 2006). Inflation is hence the product of the interrelations between money supply and production. Bearing this convention in mind, economist theories are divided into three schools; 1.  The ones that believe the process itself is the determining factor (Keynesian)2.  those who believe that the monetary effects are determinants (monetarists)3.  those who b elieve that production (supply) is the determining factor showing lack of products (goods and services) as dominant factor that causes inflation Internal inflation is as a result of increased supply and credit. Inflation can also be described as undue increase of a country’s currency or expansion of the cash amount particularly issuance of paper money not redeemable in specie. According to monetarists, monetary effect on inflation is as a result of money supply and that the increase rate is faster than that of national income growth.... Inflation is hence the product of the interrelations between money supply and production. Bearing this convention in mind, economist theories are divided into three schools; 1. The ones that believe the process itself is the determining factor (Keynesian) 2. those who believe that the monetary effects are determinants (monetarists) 3. those who believe that production (supply) is the determining factor showing lack of products (goods and services) as dominant factor that causes inflation Internal inflation is as a result of increased supply and credit. Inflation can also be described as undue increase of a country's currency or expansion of the cash amount particularly issuance of paper money not redeemable in specie. According to monetarists, monetary effect on inflation is as a result of money supply and that the increase rate is faster than that of national income growth. The quantity theory of money derives the following expression: M V = P Y Where (M) is money supply, (V) is velocity of money, (P) is the price index, plus (Y) as real income. Monetarists assert the velocity V to be fixed while the national income (Gross Domestic Product) Y is determined by supply factors and is hence independent variable affecting money supply. Accordingly, there is a direct correlation in existence. If a considerable rise in the money supply, the extent at which price height will go up by the same margin. By this perception, a rise in the money supply would lead to a similar boost in cumulative demand in the short-run the rise would cause another rise in the actual degree of output. On the other hand, there would be an increase in earnings which will cause and increase in inflation and thus the