China’s money supply

Anyone who’s taken a basic economics course would probably know P= M/Y
where P is the price of goods (which reflects inflation), M is the money supply in the economy and Y is the output of goods produced in the economy. If output increases, money supply has to increase proportionally to keep the prices at a constant level -lest there be inflation. Generally in an economy that doesn’t trade, increase in output would decrease demand and hence the prices would go down and money supply remains the same. But in a framework with international trade, an increase in output of goods might simply increase exports, keeping the Y variable consumed in the nation constant and driving up the M variable which reflects the monetary proceeds from exports.
M increases, Y is constant, what happens to P? it has to go up in tandem with M. Hence, the prices rise and inflation sets in, as observed in China..
The Chinese authorities in order to control the inflation target the money supply by investing more funds abroad (reduce P by reducing M?).
Or they could simply stir domestic consumption by consuming a higher proportion of their own goods produced (reduce P by increasing Y)

All this by the way is of questionable logic since I haven’t confirmed by beliefs with anyone yet..haha


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