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Money, Banking, and Inflation

In: Money, Banking, and the Business Cycle

Author

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  • Brian P. Simpson

Abstract

Since the business cycle is an economy-wide, general phenomenon, money is a good candidate to help explain the cycle. Money is an asset readily acceptable in exchange in a given geographic area and is sought for the purpose of being re-exchanged. Virtually all transactions take place in the economy through the use of money. All prices are money prices. Profits are calculated in terms of money. Interest rates are also calculated based on monetary relationships. If one wants to understand the business cycle, one must begin here.1 Further, the manner in which the banking system creates money is also important to an understanding of the business cycle. This topic will also be discussed in this chapter. Finally, it will be shown that inflation—and its role in the business cycle—can only properly be understood based on its relationship to increases in the money supply. As a part of the section on inflation, the problems with the popular definition of inflation—a sustained increase in the general price level—will be discussed.

Suggested Citation

  • Brian P. Simpson, 2014. "Money, Banking, and Inflation," Palgrave Macmillan Books, in: Money, Banking, and the Business Cycle, chapter 1, pages 9-28, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-137-33149-6_2
    DOI: 10.1057/9781137331496_2
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