What is inflation and how does it come from supply or demand side?

Inflation - a situation in which the general level of prices in the economy is rising.

            Cause: money supply that grows too quickly.

supply   —> Prices and value of money are inversely related. I.e. money short in supply is very valuable therefore it buys lots of stuff and it decreases the prices. (you can get 10g for 10p). BUT if money is very common, then it is less valuable and to get 10g you need to pay 1$ -> inflation.

demand —> demand for money tends to grow slowly over time. Three scenarios:

if the government increases supply at the same rate as growing demand -> prices don’t change

if the government increases supply at a faster rate than growing demand -> inflation

if the government increases supply at a slower rate than growing demand -> deflation

Therefore price level is PROPORTIONAL to the quantity of money circulating in the economy

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