Inflation An Increase In Money Supply Economics Essay

1597 words (6 pages) essay in Economics

5/12/16 Economics Reference this

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Inflation an increase in money supply or an increase in price levels which is measured as an annual percentage increase. Therefore, when there is an increase in food price of inflation, there are two effective theories that cause the problems. Thus, there are economic concepts that are geared towards the problem. However, these concepts that are being applied should be evaluated in a most effective an efficient manner.

Further on in the project you will read and get more understanding of each particular heading on “Food Prices Rising”. The references provided opportunity for further reading and explanation on the concepts in this paper.

Problems of Food Prices Rising in Inflation and The Reason Why it Consider as an Economic One.

Article: Food Prices Rising

What is Inflation?

According to, inflation is an increase in money supply or an increase in price levels which is then measured as an annual percentage increase.

When the value of a dollar does not stay constant a gradual inflation will occur which is then observed in terms of purchasing powers, which are real, tangible goods that money can buy. For example, if 3% of inflation rate occurs annually, then theoretically a $1 bag of sweets will cost $1.03 in a year.

Causes of Inflation When Food Price Rises

According to, the causes of inflation are cause by at least two theories that are generally accepted. These are:

Demand-pull inflation- this theory states that if demand is increasing more than supply, food prices will therefore increase, and this usually will occur in growing incomes.

Cost-push inflation- for increase in food prices to maintain their profit margin, companies’ cost must group. Increased cost such as wages, taxes, etc.

Inflation is considered evil by most individuals, but it isn’t necessarily so. Reason being, inflation affects different people in different ways, but it depends on whether it is anticipated or unanticipated. Thus, if compensating and the cost isn’t high, the inflation rate is said to corresponds to what the majority of people are expecting (anticipated inflation). For example, bank can vary their interest rates and buyers can make an agreement or disagreement of contracts that may include automatic wage hikes as their food prices level increases.

Problems which arise when there is unanticipated inflation:

Creditors lose and debtors lose only if the lender doesn’t anticipate the inflation of food price increasing correctly. But for those who borrow, this is similar of getting on interest-free loan.

Domestic- products become less competitive only if the inflation rate of food price is greater than that of other countries.

Uncertainty about what will happen next that will makes corporation and consumers less likely to spend and therefore, this will hurt economic output in the long run.

Economic Theories Pertaining to Inflation When Food Prices Rising

Economic theories or models pertaining to inflation are approach on food price when rising. They are as followed:

The excess demand approach- suggests that inflation on food price rising is a situation in which the total demand for goods exceeds the total supply of goods.

The quantity theory of money approach-states that there’s an equal relationship between the national income rates at market prices and the velocity of circulation of the money supply. In other words.


M is the merchandise of money in circulation

V is the velocity of circulation

P is the general food price level

Y is the total income

Keynesian theory-a general increase in food price level which is created by an increase in the aggregate demand both over and above the increase aggregate (total) supply. An increase in government expenditure (G), in private consumption (C) and in private earnings (E) will show an increase in aggregate demand only if an economy which to be at its full employment output level.

However, a situation like this happens when a full employment of output which a given economy is unable to increase its output or total supply in response to an increase in total demand.

According to the graph above, when monetary and fiscal policies are being used by the government to improve full employment of production levels, an increase in aggregate demand level of the economy from AD0 TO AD1 would then result in the creation of full employment level of equilibrium output represented at point E. If the aggregate demand level chose to increases further from AD1 to AD2, the general food price levels shall increase since the employment of production level will remain unchanged at YF. The output level will not change since all resources are fully employed at the point of YF.

An aggregate demand level over and above the full employment of production level will create an inflationary gap of EF. In addition, an aggregate demand below the full employment of production level will create deflationary gap of ED.

Monetarism- in order to grow or increased production, the money supply must increase within a given economy.

Since the monetarist explains the relationship using the theory of nature rate of unemployment, there will be a level of equilibriums output, and both corresponding level of unemployment and employment naturally which will then decide the situations based on features such as resources employment, etc.

The expansionary monetary policies will result in decrease level in the natural rate of unemployment and will then increase the production in short run, but the effectiveness of the expansion policies will be limited in the long run and but will then lead to an inflationary situation after words.

Structuralism- mainly used to explain the nature and basics of inflation in developing countries. Reasons for causing the food price rising rates in developing countries is because it is effected by the in-elasticity of the following:

Production level and capacity

Capital for mutations

Institutional framework

In-elasticity of the labour force and employment structured

High in-elasticity in the agricultural sector

Economic Concepts

Scarcity-states when there is only a finite amount of resource (human and non- human).

Resources- (factor of production) are scarce factor of production such as.

Land- original fertility and mineral deposits, water and climate

Labour- humans contribution towards workforce, whether thinking and doing.

Capital- all manufacturer resources such as building, machines, equipment and improvements to land.

Entrepreneurship- a situation when making basic business policy’s decisions is occurring.

Opportunity Cost- to obtain something or satisfy a want, the highest valued alternative must have in consideration.

Production Possible Curve (PPC) – Which shows the different combinations of goods that a product can produce given its resources and the state of technology.

Good A

Good B

Thus, the PPC includes the maximum amount of two goods that can be produced if all the resources are used in the most efficient way. Such, all the combinations on and below the PPC are attainable (X, A, B, Z), and the combinations that are above are unattainable (M).

Benefits of Applying the Economic Concepts

Evaluating the Economic Concept using the technologies whereas resources and time factor comes in place. Thus, the output and input methods should be measured in the same basis.

Time factor, an appropriate time period that has to be determined depending on the type of production system, for example, 5-10 months or 12 years. During that period, resources, particular activities, and other factor will change and require analysis and monitoring.

In conclusion, when inflation of the food price rises, there will be a decrease in demand supply. Thus, between 2007 and 2008 the Congressional Budget Office found that comparison attempt to meet government mandates at about 10-15 percent of food price inflation has a direct result biofuels production. This unintended consequence has prompted US to speak out against biofuels mandates time and time again.


An outline of the problem of the food prices rising as being research

A recommendation of the economics concepts are being employed to correct the issue of the food price rising on inflation.

Research of the economic theories pertaining to the problem has being evaluated.

The benefits of applying the economics concepts should are binge aware of in order to reduce the food price levels on inflation.


Base on the judgment of the food price rising in inflation, it’s either an increase in money supply or an increase in price levels which is measured as an annual percentage increase. However, as the food price rises, every dollar that’s own buys a smaller percentage off a good or service. It then affects different people in different ways but it depends on whether it is anticipated or unanticipated. Thus, if compensate and the cost isn’t high, the inflation rate is said to be an corresponding to what the majority of people are expecting (anticipated inflation).

In effect, that’s how the economic theories and the economic concepts come in place to solve the problem of food price rising in an economic problem of inflation.

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