How does inflation cause the demand for money to go higher? i thought that the higher inflation meant the same amount of good caused meant people had to spend more and thus demanded less?
Higher inflation means the prices of goods and services are higher, so it will take a greater quantity of money (ie, an increase in the demand for money) to buy the same real amount of goods and services.
1 Like
hey thanks for you reply… where im stuck. Inflation causes demand for money to increase, then that would put pressure on real interest rates to increase. however using the fisher equation, real IR = Nom IR - inflation, this implying that real interest rates should be decreasing?
many thanks for your help