<p>No it doesn’t need to correspond to additional money supply per se, although it would be unrealistic to sustain high inflation expectations over longer periods of time if there are no other real fundamental cases.</p>
<p>If we express the LM equation with real interest rate and in logarithms we get;</p>
<p><span class="math-container">$$p= m - l(y(r), r+ \pi^e)$$</span></p>
<p>Where <span class="math-container">$p$</span> is price level (change of which is the inflation <span class="math-container">$\pi$</span>, <span class="math-container">$m$</span> is the money supply, <span class="math-container">$l$</span> money demand which depends on real output <span class="math-container">$y$</span>, and nominal interest rates that are composed of real interest <span class="math-container">$r$</span> and inflation expectations <span class="math-container">$\pi^e$</span>.</p>
<p>Even if we would hold <span class="math-container">$m$</span> constant, inflation expectations alone can result in higher or lower inflation. There does not need to be any corresponding change in <span class="math-container">$m$</span>.</p>
<p>Moreover, a variable can be correlated with more than 1 variable, in terms of empirical model we can have;</p>
<p><span class="math-container">$$\pi = \beta_0 + \beta_1 m + \beta_2 \pi^e + u$$</span></p>
<p>and we can have <span class="math-container">$\beta_1 \neq 0$</span> and <span class="math-container">$\beta_2 \neq 0$</span> at the same time.</p>

CC BY-SA 4.0
2024-09-08T17:17:16.320Z
But if wages rise as well, wouldn't that mean people are being paid more and hence as a whole have more money (even if that doesn't buy much more, because of inflation in prices)
user49920
CC BY-SA 4.0
2024-09-08T18:42:16.293Z
@user49920 it does not mean there is more money supply. Higher income does not imply more money supply, incomes can raise with money supply being constant even in nominal terms because a bill can be used to settle more than 1 transaction
1muflon1
CC BY-SA 4.0
2024-09-09T03:06:26.103Z
I'm not sure if I fully understand... Could you elaborate a bit on "Higher income does not imply more money supply because a bill can be used to settle more than 1 transaction."
user49920
CC BY-SA 4.0
2024-09-09T05:32:59.880Z
Is what you're saying what BKay wrote in the comment above, i.e "If people think that the price level is going to be higher, and the money supply is held fixed, one way this can happen is the the velocity of money can rise (MV = PY). People race to spend dollars they think will be worse less, which increases the effective money supply (m⋅v)"
user49920
CC BY-SA 4.0
2024-09-09T10:07:25.153Z
@user49920 yes, velocity is how many times 1 unit of currency is used on average. For example, single 100 dollar bill can theoretically pay for infinite amount of transactions (although that would be very impractical). Every expenditure is someone else's income.
1muflon1
CC BY-SA 4.0
2024-09-08T16:12:04.030Z
2024-09-08T16:12:04.030Z
1muflon1
<p>One cause given for inflation is inflation expectations. When firms expect inflation, they raise prices and employees demand increased wages</p>
<p>However, this additional money in the economy must come from somewhere.. right? So what I wanted to know is in inflation caused through this mechanism</p>
<ol>
<li>Does it correspond to an increase in money supply. So money supply and inflation remain correlated but in this mechanism, the increase in money supply is not the cause</li>
<li>If so, where does this additional money in the economy come from?</li>
</ol>

CC BY-SA 4.0
2024-09-09T03:17:38.237Z
If people think that the price level is going to be higher, and the money supply is held fixed, one way this can happen is the the velocity of money can rise (MV = PY). People race to spend dollars they think will be worse less, which increases the effective money supply ($m \cdot v$), and the effect is higher prices when output is fixed.
BKay
CC BY-SA 4.0
2024-09-09T05:33:45.937Z
@Bkay Ah, okay, that makes sense.
user49920
CC BY-SA 4.0
2024-09-09T05:56:19.043Z
@BKay Can we then say that inflation always correlates with the effective money supply if the supply-side is fixed?
user49920
CC BY-SA 4.0
2024-09-18T09:42:13.830Z
I'm not familiar with the term "effective money supply," so your question is hard for me to answer. Milton Friedman said, "Inflation is always and everywhere a monetary phenomenon", but in my view both changes in the quantity and the velocity of money can be thought of as "monetary phenomena." But he also said “The lag [between changes in monetary policy and the macro economy] is not only long, but it is also variable; that is, the time between cause and effect can differ from episode to episode in a way that is difficult to predict.”So any immediate correlations may be very small and noisy.
BKay
<inflation><money-supply>
When inflation expectations cause inflation, where does the corresponding money supply come from?
user49920
# When inflation expectations cause inflation, where does the corresponding money supply come from?

(Asked by: username_0 on 2024-09-08)

One cause given for inflation is inflation expectations. When firms expect inflation, they raise prices and employees demand increased wages

However, this additional money in the economy must come from somewhere.. right? So what I wanted to know is in inflation caused through this mechanism

1. Does it correspond to an increase in money supply. So money supply and inflation remain correlated but in this mechanism, the increase in money supply is not the cause
2. If so, where does this additional money in the economy come from?

**Tags:** inflation, money-supply

> **Comments:**
> **username_1**: If people think that the price level is going to be higher, and the money supply is held fixed, one way this can happen is the the velocity of money can rise (MV = PY). People race to spend dollars they think will be worse less, which increases the effective money supply ($m \cdot v$), and the effect is higher prices when output is fixed.  
> **username_0**: @username_1 Ah, okay, that makes sense.  
> **username_0**: @username_1 Can we then say that inflation always correlates with the effective money supply if the supply-side is fixed?  
> **username_1**: I'm not familiar with the term "effective money supply," so your question is hard for me to answer. Milton Friedman said, "Inflation is always and everywhere a monetary phenomenon", but in my view both changes in the quantity and the velocity of money can be thought of as "monetary phenomena." But he also said “The lag [between changes in monetary policy and the macro economy] is not only long, but it is also variable; that is, the time between cause and effect can differ from episode to episode in a way that is difficult to predict.”So any immediate correlations may be very small and noisy.  

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## 1 answers

### Answer by username_2 on 2024-09-08. Score: 0

No it doesn’t need to correspond to additional money supply per se, although it would be unrealistic to sustain high inflation expectations over longer periods of time if there are no other real fundamental cases.

If we express the LM equation with real interest rate and in logarithms we get;

$$p= m - l(y(r), r+ \pi^e)$$

Where $p$ is price level (change of which is the inflation $\pi$, $m$ is the money supply, $l$ money demand which depends on real output $y$, and nominal interest rates that are composed of real interest $r$ and inflation expectations $\pi^e$.

Even if we would hold $m$ constant, inflation expectations alone can result in higher or lower inflation. There does not need to be any corresponding change in $m$.

Moreover, a variable can be correlated with more than 1 variable, in terms of empirical model we can have;

$$\pi = \beta\_0 + \beta\_1 m + \beta\_2 \pi^e + u$$

and we can have $\beta\_1 \neq 0$ and $\beta\_2 \neq 0$ at the same time.

> **Comments:**
> **username_0**: But if wages rise as well, wouldn't that mean people are being paid more and hence as a whole have more money (even if that doesn't buy much more, because of inflation in prices)  
> **username_2**: @username_0 it does not mean there is more money supply. Higher income does not imply more money supply, incomes can raise with money supply being constant even in nominal terms because a bill can be used to settle more than 1 transaction  
> **username_0**: I'm not sure if I fully understand... Could you elaborate a bit on "Higher income does not imply more money supply because a bill can be used to settle more than 1 transaction."  
> **username_0**: Is what you're saying what username_1 wrote in the comment above, i.e "If people think that the price level is going to be higher, and the money supply is held fixed, one way this can happen is the the velocity of money can rise (MV = PY). People race to spend dollars they think will be worse less, which increases the effective money supply (m⋅v)"  
> **username_2**: @username_0 yes, velocity is how many times 1 unit of currency is used on average. For example, single 100 dollar bill can theoretically pay for infinite amount of transactions (although that would be very impractical). Every expenditure is someone else's income.  

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