Escalona, James Adriane S.

EOMAB
Impact of Money supply on Output, inflation rate and interest rate
The impact of money supply on output, inflation rate and interest rate are interconnected
towards one another. Through the course of this paper, we will discuss the relationship of money
to the three variables and determine what is their relationship. The journal article of Zina Cioran
will be a basis on the contents of this paper, creating the formula we needed in answering the
impact of money supply in the other given variables.
Money supply changes interest rates they are related towards one another. If there is less
money it means there is a high interest rate which will take us to contractionary monetary policy.
On the other hand, if there is more money with low interest rate it will lead us to Expansionary
monetary policy. If Contractionary policy was implemented there are increasing interest rates that
would make a country sell government securities, it decreases the money supply in a country’s
economy. Furthermore, Expansionary monetary policy is being utilized in order to grow a
domestic economy. There is mutual interconnection from these variables from different studies,
with views that are opposite from other studies. It is stated that real GDP and money supply has
causality between each other which varies in time, which was also the same from the US and UK
economy. When interest rates are low, more businesses and individuals demand more loans that
would increase the supplied money. In a study conducted in Czech Republic, the Granger causality
is present in the three variables which were backed up by correlation coefficients showing results
that there is a relationship between interest rate, money supply, price level and real GDP
(Urbanovsky, 2016).
In the study of Zina Cioran in the relationship between Macroeconomic variables in
Inflation, Monetary policy is well elucidated in the study. Inflation will always be present in a
monetary phenomenon, using regression methods the researchers were able to conduct a study
between the relationship of the aforementioned variables. GDP and economic growth cannot be
measured and studied without the governmental policies as they have implications in the economy,
in the case of monetary policy which is a key component of an economic policy that adjusts the
quantity and cost of money to stabilize prices that would regulate the supply of money. Monetary
policy influences in a significant period of time not only with price but also with: Employment
rate, GDP, investments, economic growth and other economic activities. It is stated in the paper
the Price stability is the main purpose of monetary policy, it must be expected that prices will have
constant change and it is not always stable or fixed.