Simplifying money supply and its impact on inflation and some tips on how to tackle a concept like this. What is inflation? In simplistic terms inflation refers to the rate at which prices are going up in general.
Hi, everyone, Rebecca here at the Coach’s Hangout. Even though I have a commerce degree and passed the Canadian Securities Course, along with other industry courses, that does not make me an economist. This also means if you are taking the Canadian Securities Course you will not be expected to have an in-depth knowledge of the economy but you do need to have a general understanding.
In this video I’m going to simplify money supply and its impact on inflation and give you some tips on how to tackle a concept like this. But if you want to dig a little deeper check out our full study packages available at SeeWhy learning.com.
Now we’re going to talk about the impact money supply can have on inflation but let’s pump the brakes a bit. What is inflation? In simplistic terms inflation refers to the rate at which prices are going up in general. This is measured by something called the consumer price index or CPI, which is basically a notional basket of 600 goods and services which is a fair representation of what the average Canadian household would purchase.
You don’t need to know what the CPI is specifically made up of. It includes necessities like groceries, clothing and gasoline but it does not include luxury items like a yacht. The value of this basket is tracked and the percentage by which it increases in price is referred to as the inflation rate.
For example, if the CPI went up 5% last year we would say inflation was 5%, which basically means overall prices have gone up by 5%. If it went down it is referred to as deflation but that’s a whole other video and it may come to your surprise that deflation is actually not a good thing.
Before moving on I want to stress that there are many different variables impacting inflation, which again, is just the rate at which the prices of things are increasing. Think of it like a balloon with many strings attached. Some strings, or variables, may be putting upward pressure on inflation while others are putting downward pressure, all to varying degrees.
Pretty complex, right? I suppose it’s the collective strength of these pressures which ultimately dictates the inflation rate. This is how one economist could make an entirely different forecast on inflation as compared to another economist.
Now, here’s the good news for you as a student. You’re not going to be given a bunch of statistics and be asked to make a prediction on the inflation rate. Instead, you will be expected to understand how one variable in isolation would impact inflation. In fact, questions may even start with the wording, all else being equal.
So for the purpose of your studies focus on just one concept at a time. For example, if the money supply increases what pressure will it put on the inflation rate, or if demand outstrips supply what pressure will it put on the inflation rate? As I said earlier, there are many variables at play.
So all else being equal how would an increase in money supply impact the inflation rate?
When grappling with a concept I try to boil it down to a simple scenario so I can understand it and remember it better. For something like this I think of me and nine of my friends, operating in our own little private economy.
Let’s say that today I announce that I’m selling my foosball table. We all love that foosball table. I might get offers of around $150, if I’m lucky. We’re all pretty broke, but if suddenly they all had a lot more money in their pockets I’d likely get some better offers, maybe $250. Makes sense right?
Stated another way, all else being equal, an increase in money supply will put upward pressure on inflation. Now notice I said pressure. It’s not a guarantee. As I said at the top of this video there are many variables at play. So leave the economic forecast to the professionals.
I hope you found this video helpful. I know it was a very simplistic example but I think boiling it down to the basics will give you a good foundation and allow you to get a lot more out of your studies.
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