... Pt, on one hand, as money supply increases, the inflation rate rises as well followed by an increase in nominal interest rate. It then reduces the real money demand. This causes an exceed money supply. People tend to buy more goods as they hold more money than they wish. An increase in demand of good put upward pressure on price. On the other hand, at the date when the rise is announced, there is no sudden increase in the growth of the money supply but a tendency to growth faster from then on. Therefore, the money balance will not hold as real money supply (Mt / Pt) exceeds real money demand. To reach new money balance, price jumps so as to cut back on real money supply and equals the reduced money supply. Q4. The inflation tax works only when inflation is unexpected. Explain. Do commercial banks benefit or lose ...

See this essay or coursework document in full right now