Finance, Forex and Investments

. When a central bank continues to inject money into the economy slightly, people do not notice the change i?

. When a central bank continues to inject money into the economy slightly, people do not notice the change in the money supply in their daily lives. Why do the price levels still keep rising even though people do not recognize the slight annual increase in the money supply? Explain the mechanism of this inflation.

Public Comments

1. Because, like anything else, when the supply increases the unit value goes down. If the central bank increases the supply of money faster than underlying economic growth, the value of the currency must long term fall. Short term, factors such as velocity may affect how the inflation of the money supply gets transferred into general prices.
2. As more money goes into the economy there is slight inflation. People get paid more, but at first because they don't know the money supply has increased they see a larger paycheck and think they are making more money; they are making more nominally, but most likely less or the same in real dollars. People have more money so they spend more which leads to increased demand and a rise in prices, aka inflation.
3. No one is cognizant of the entire money supply -- that's irrelevant to them. What people see is that they are individually making more money, or get hired for a job, or get approved for a loan. That's how money supply expansion trickles down to individuals. And now having cash in hand, they go to the store and buy things. So storekeepers and businesses notice that they are selling their merchandise with little difficulty. Since everyone is motivated to make money, the businesses start raising some prices. They discover they can get away with it, and raise more prices. Customers don't flee to the competition, because the competition is raising prices too. When that happens on a wide enough scale, the result is general inflation.