Agreement Inflation

Monetarists believe that the most important factor that influences inflation or deflation is how quickly the money supply increases or decreases. They consider that fiscal policy or public spending and taxes are ineffective in controlling inflation. [53] The monetarist economist Milton Friedman said, „Inflation is always and everywhere a monetary phenomenon.“ [54] Under a monetary system with fixed exchange rates, the currency of a country is linked to another single currency or a basket of other currencies (or sometimes to another value, such as gold). A fixed exchange rate is normally used to stabilize the value of a currency against the currency to which it is linked. It can also be used as a means of controlling inflation. However, when the value of the reference currency rises and falls, the currency linked to it rises and falls. This essentially means that the rate of inflation in the country with a fixed exchange rate is determined by the inflation rate of the country to which the currency is linked. In addition, a fixed exchange rate prevents a government from using national monetary policy to achieve macroeconomic stability. The Austrian school points out that inflation is not uniform for all assets, goods and services. Inflation depends on differences in markets and where newly created money and credit enter the economy. [Citation required] Ludwig von Mises said that inflation should refer to an increase in the money supply that is not offset by a corresponding increase in monetary needs and that price inflation will necessarily follow. (This level of output corresponds to the unin accelerated inflation rate of unemployment, NAIRU, or the „natural“ unemployment rate or the full employment unemployment rate.) If GDP exceeds its potential (and unemployment is below the NAIRU), the theory is that inflation accelerates if suppliers raise their prices and integrated inflation deteriorates. If GDP falls below its potential level (and unemployment is above NAIRU), inflation will slow as suppliers seek to fill overcapacity, drive down prices and undermine integrated inflation.

[50] The theory of rational expectations holds that economic actors look rationally to the future when seeking to maximize their well-being and not only respond to immediate costs and opportunity pressures.