Reply To: Inflation and Economic Growth


Concerning the first paragraph of the response above, of course the purchasing power of money, like the price of any good, can change from either a change in demand or a change in supply. So, perhaps it’s best to used the phrase “monetary inflation” to refer to supply-driven decreases in money’s purchasing power and “price inflation” to refer to fall in money’s purchasing power.

The second paragraph of the response above fails to mention the fact that for people to increase their demand for all goods, they must either have more money or reduce their demand to hold money.

The third paragraph makes a similar oversight. Costs of production are determined by prices of inputs. Without more money or reduced demand to hold money, entrepreneurs cannot increase their demands for inputs nor consumers their demand for outputs on all inputs and outputs throughout the economy. Moreover, costs of production are determined by input prices which are themselves determined by output prices, not the other way around. Neoclassical economists call this the marginal productivity theory of input prices.

The fourth paragraph ignores the purchasing power parity theory of exchange rates. The purchasing power of a given money tends to be the same everywhere it trades, both domestically directly for domestic goods and internationally through exchange for foreign currency which is then used to buy foreign goods. Monetary inflation of a domestic currency, ceteris paribus, generates both domestic price inflation and relative devaluation of the domestic currency against foreign currencies.