<p>In both the cases mentioned above you see that decrease in money supply leads to fall in prices. There is no conflict. </p>

CC BY-SA 3.0
2017-05-04T21:55:03.103Z
2017-05-04T21:55:03.103Z
Abhishek Kumar
<p>When there is an increase in price level, real money supply decreases and raises interest rates.</p>

<p>In a similar situation, when money supply decreases, interest rates increases, consumption decreases, demand is reduced and price levels decreases.</p>

<p>In both cases, money supply decreased, yet the price levels have conflicting eventualities, why?</p>

<p>Also, if you continue down the analysis, it goes a full cycle. Does this mean that inflation is self-defeating since it eventually cancels itself out?</p>

CC BY-SA 3.0
2017-05-04T13:42:09.670Z
What are your assumptions of your model?
Kuantew
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2017-05-04T19:08:44.897Z
@Xenidia simply in general. Markets always clear, no complications. Just intuitive thinking
MH.Q
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2017-05-05T07:28:01.850Z
Re: "When there is an increase in price level, real money supply decreases and raises interest rates." - where did you get that set of ideas from? Makes no sense to me at all.
Mick
CC BY-SA 3.0
2017-05-05T13:06:43.927Z
http://internationalecon.com/Finance/Fch40/F40-10.php @Mick
MH.Q
<inflation><money-supply><price-level><business-cycles>
Causality: Money supply and prices
MH.Q
# Causality: Money supply and prices

(Asked by: username_0 on 2017-05-04)

When there is an increase in price level, real money supply decreases and raises interest rates.

In a similar situation, when money supply decreases, interest rates increases, consumption decreases, demand is reduced and price levels decreases.

In both cases, money supply decreased, yet the price levels have conflicting eventualities, why?

Also, if you continue down the analysis, it goes a full cycle. Does this mean that inflation is self-defeating since it eventually cancels itself out?

**Tags:** inflation, money-supply, price-level, business-cycles
> **Comments:**
> **username_1**: What are your assumptions of your model?  
> **username_0**: @Xenidia simply in general. Markets always clear, no complications. Just intuitive thinking  
> **username_2**: Re: "When there is an increase in price level, real money supply decreases and raises interest rates." - where did you get that set of ideas from? Makes no sense to me at all.  
> **username_0**: http://internationalecon.com/Finance/Fch40/F40-10.php @Mick  

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## 1 answers

### Answer by username_3 on 2017-05-04. Score: 0

In both the cases mentioned above you see that decrease in money supply leads to fall in prices. There is no conflict.


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