Topic 8: Relation between money and price level

The relation between money and price level is extremely significant in a market economy.

When the amount of money supplied increases, it means that there are a lot of demands, the price level increases too. And in contrast, if the money supply decreases, the price level decreases. Take an example of the case that 20 loaves of bread are produced each day. Each bread sold for $1. If consumers have $1 to buy bread, they will have one bread. However, if consumers have more than $1 to buy bread, they are willing to buy it. At the moment, the money supply rises. If producers only sold 20 loaves of bread a day, they must rise the price level of bread. Thus, in a market economy, the relation between money supply and price level is .... increasing money supplyà inceasing price level, decreasing money supply à decreasing price level.

*) Causes of inflation

- When the price level increases, inflation results. If money supply increases , people become willing and able to pay higher prices for the goods & services they want. Thus, demand increases. It pulls the price level increases too. Therefore, inflation results from rising money supply. This means that the money supply of consumers (demand of consumers) is pulling prices of goods and services to higher and higher levels è Demand-pull: rising demand.

- Cost-push: Increasing costs. When the owners of stores have to pay more for the goods they sell, they will raise their prices. And the prices of other costs rise too much as raw materials, taxes, etc. As workers see that they have to pay more for the things they want in day life, they will ask to increase wage. The reason is to make up for increased living costs. But it's not the end. If workers win wage increases, businesses will often raise their prices with still higher prices to pay, workers again ask for higher wages. The repetition makes an inflationary spiral. In an inflationary spiral, cost push up prices.

Topic 9: Who are the beneficiaries and victims of inflation? Why?

a) The beneficiaires of inflation:

- People who owe money: Those who borrow money before the start of an inflation may benefit from it. They have to repay their loans in the period of inflation, their loans are worth less than when they borrowed these loans. Ex: In 2000, the dollar had more than twice the purchasing power of the 2010 dollar. If someone who borrowed $5,000 in 2000 would have been able to repay the loan in 2010 with dollars that were worth only $2,500. This means that in 2000, with $5,000 people can buy a house but in 2010, the same house costs $10,000. In inflation, the value of money is diminished.

- People who own real estate: People who own homes or other properties find that their value has increased during a time of inflation. For example, a home purchased for 20,000,000VND in 1996 might sell for 350,000,000VND in 2010. In inflation, money is diminished, with a large amount of money, we can only buy a few things while house and other properties are not diminished, in constract, to buy a house, it's necessary to have a big amount money. As, people who own real estate are benefited in period of inflation.

b) Victims of inflation

- Retired people: Because retired people usually live on incomes from private pensions, bonds and social security. Their incomes are fixed while prices more and more increase. During inflation, the elderly are often forced to spend less with a fixed income before inflation, they can spend enough for living but during inflation the prices all goods and services increase. Thus, with the same amount of money, they will buy less than before. To limit consequences of inflation to retired people, social security income keeps up with inflation.

- People with savings: Because of inflation, money which people put into savings accounts is worth less after a period of years than when deposited it. This means that with an amount of money we can buy more much goods in year when they saved than after a period of years. For example, my parents had 10,000,000VND, they decided to deposit it in a savings account in 2000. Although, the interest on their saving was 12% per annum, their money has less value now than. Now they have 22,000,000VND. In 2000, gold cost 5,000,000VND/tael, 10,000,000VND=2 tael. In 2010, 36,500,000VND/tael, 22,000,000 =0.6 tael.

- People with low income: In general, people who earn low wages are forced to spend all things in life. In inflation, theyhave little enough to spend for living. They have to be forced to make do with fewer necessities as food, clothing and housing cost more.