Question

Due to the fact that high rates of growth of money supply always result in a high rate of inflation. Is high rates of inflation easier to happen in a commodity currency system than in a fiat currency system?

Answer 1

We know that a high rate of growth of the money supply leads to a high rate of inflation.

• In a commodity currency system, the commodities having an intrinsic value are used as a medium of exchange and hence, the money supply in such systems depend on the availability of such commodities.
• In the fiat currency system, the currency used is representative in nature i.e., the intrinsic value of the money is far less than its face value. In such a scenario, the money supply can be increased very easily and in lesser time compared to the commodity money system
• Hence, it is easier to have high rate of inflation in a fiat currency system compared to that of commodity currency system