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International liquidity and inflation

J

Jinnentonix

Member
The notes say that too much international liquidity can fuel inflation.

My question is how that happens. Is it that a massive supply of domestic currency causes inflation because people just have more cash in their hands to spend on the same number of goods and services in the economy?

Please let me know if there's anything else to consider.

Cheers
 
Yes, you're right. There is a view that inflation is caused by too much money in circulation. This is based on the quantity theory of money, which is covered in Module 18. The mechanism through which the money supply affects prices is quite complex (it's called the monetary transmission mechanism) and this is also explained and discussed in Module 18.
 
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