n, V = 4 (V = M/T). Now assume that the money supply increases whilst the demand for money is still stable. People will now find themselves holding excess money balances, because the money supply is greater than 25% GDP: the supply of money has become greater than the demand for money, and V is less than 4. People will try to reduce their money holdings by spending on goods and services. The effect of this increased expenditure is to increase GDP. This process shows that, for a stable V, any increase in the money supply brings about an increase in the demand for goods and services.It is the monetarist view that there is a natural rate of unemployment in the economy – that there is a certain level below which it cannot be reduced because of factors such as frictional, voluntary, seasonal, structural and regional types of unemployment.At any amount of National Expenditure in the AD/AS model before the that level of output at which the natural rate exists, an increase in expenditure will result only (in the long run) in an increase in the total value of transactions, and no increase in the general level of prices (no inflation). However, once GDP reaches that level, any further increases in it will result only in price increases, and there will be no more gains in employment. (See diagrams: Appendix 1)As far as the UK experience goes, the most significant example of demand-pull inflation in recent years was the Lawson Boom in the late 1980’s. Nigel Lawson as Chancellor brought interest rates down, and this, coupled with Margaret Thatcher’s expansionary fiscal policy (tax cuts, not spending!) caused an expansionary shock – the economy had had a stable price level, at close to the level of the Natural Rate of Unemployment (which was high, but the idea was to reduce it). However, a sudden boom in investment spending (caused by low interest rates) coupled with an equally sudden one in consumption (resulting from the tax...
