Write the following essay on Relationship between Money Supply and Inflation in Saudi Arabia. Write a 2750 word paper answering; Lucas (1995) has always put emphasis that there is a long run connection connecting money supply to prices of goods. Inflation and money supply cannot be separated and where there is inflation, there is monetary phenomenon. The increase in money supply is the root cause of increase in prices of commodities and this is what constitutes the central dogma of inflation. . Inflation has been categorized as either domestic or imported. This is because inflation may come as a result of increased cost of imports (high prices on imported goods) and services from within the country or due to the monetary exchange rates (Jackson &. Miles 2006). Inflation is hence the product of the interrelations between money supply and production. Bearing this convention in mind, economist theories are divided into three schools. 1. .The ones that believe the process itself is the determining factor (Keynesian)2. .those who believe that the monetary effects are determinants (monetarists)3. .those who believe that production (supply) is the determining factor showing lack of products (goods and services) as dominant factor that causes inflation Internal inflation is as a result of increased supply and credit. Inflation can also be described as undue increase of a countrys currency or expansion of the cash amount particularly issuance of paper money not redeemable in specie. According to monetarists, monetary effect on inflation is as a result of money supply and that the increase rate is faster than that of national income growth.
Relationship between Money Supply and Inflation in Saudi Arabia
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