... of money circulating around the economy. Inflation and the money supply effect consumer demand and increasing costs on a business. Too much spending leads to demand-pull inflation, Keynesians strongly argue that this is one of the major causes of inflation. This excess spending leads to an increase in demand that cannot be matched by the level of supply. As demand is greater than supply, prices will therefore rise. Businesses also experience increasing costs as money supply and inflation increase, which is known as cost-push inflation. As demand increases, labour costs may increase as workers and unions will push for an increase in wages. There are a number of policies that can be used in order to reduce the level of the money supply circulating around the economy which in turn will reduce the level of inflation. Compare the relative merits of targeting the rate of inflation and targeting the rate ...

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