Question

Milton Friedman once stated that inflation is always and everywhere a monetary phenomenon, meaning that an economy must use money to experience inflation. Using the definition of inflation, explain why his statement is true by considering if inflation could exist in an economy that does not use money, ie. a barter economy. What one of the functions of money is most relevant in explaining this result?

Answer 1

Milton Friedman contends that inflation is only a monetary phenomenon. The unbalanced growth in the money supply could lead to either inflation or deflation. During the economic depression, the fall in the money supply caused a great deal of unemployment and decline in output.

Inflation refers to the rise in the general price level which is maintained for a longer period of time. it reduces the purchasing power of money. But under the barter system, there is no use of money. Thus only goods are exchanged for the goods. it would not be possible to have inflation under the barter system as we see in the monetary-based economy.

But the barter system is not free from inflation. Here we can find different forms of inflation. the rise in the production of certain goods might cause a fall in its value. it might not be exchanged or more quantity would be exchanged for some other goods. it would reduce its value. On other hand,if demand for goods rise relative to its supply, value of such good will witness sharp rise.

The medium of exchange is most prominent function of money that is being discussed here.