In its most simplest form,
“money supply is the amount of money, which is in circulation over a certain
period of time. Increases in the money supply causes increases in the prices, in
other language, the inflation, by increasing consumption expenditures and
investment expenditures." In this sense inflation's effect on economic growth,
different economists suggest that it may take both positive and negative
effects. While some economic experts, like Keynesian view, argue that inflation
affects economic growth positively, some economic experts, who are members of
Neoclassic view suggest that inflation affects economic growth negatively.(Cuma
Bozkurt)
Inflation is another macroeconomic problem which hurts both economic and social
indicators in any state.. Pakistan economy has also come across with this
macroeconomic problem.
Inflation adversely affects the overall growth, the financial sector development
and unprotected poor segment of the population negatively. (Cecchetti, 2000)
Inflation decreases the real income and also induces uncertainty. Looking at
such adverse impacts of rising prices on the economic system, In that respect is
a consensus among the worlds’ leading central banks that the price stability is
the prime target of monetary policy. King, 1999)
Maintaining the price stability is the task of a central bank and it is
accountable for achieving it.It is argued that sufficiently tight monetary
policy continued up for sufficiently long time could stop even the most deeply
rooted inflation. (Friedman, 1963)The price stability is obtained when economic
agents such as households and business stop to control inflation at the time of
decision-making.(Abdul Qayyum)
Inflation Rate in Pakistan increased 4 percent in November of 2015 over the same
month in the old yr.Core Inflation Rate in Pakistan averaged 8.40 percent from
2010 until 2015, reaching an all time high of 11.40 percent in June of 2012 and
a record low of 3.40 percent in September of 2015. When inflation occurs,
purchasing power of money loses value, and people's income decreases. An
inflationary environment decreases quality of life, eliminates people's
happiness and their optimist expectations towards the future, and involves not
only the individual but also his/her community, and finally, the society in
general.
In every state, the ultimate purpose of economic policy is to attain sustainable
economic growth with price stabilization. For this cause, monetary policy and
financial policy must be implemented in a coordinated and efficient manner so
that economic growth and price stability can be attained..
To obtain sustainable growth and price stability government should be adopted
effective monetary policy to curb money supply. If government should control
money supply and inflation, which leads to improved life standards of living and
of balanced prices.