SUPPLY-SIDE ECONOMICS

Following on from non-Keynesian theory is Supply-Side economics, which regards inflation as being the result of changes in the relative demand for money as well as the supply. Therefore, it explains the period of inflation experienced during the Black Death in Medieval Europe as being caused by a decrease in the demand for money, while the inflation experienced in the US during the 1970’s is regarded as having been caused by an increase in the supply of money as a consequence of the US exit from the Bretton Woods Agreement which pegged the value of the dollar to gold. Therefore, supply-side economists believe that the supply of money can increase without causing inflation if it is at least matched by an increase in the demand for money.

Large influences on political leaders such as UK Prime Minister Margaret Thatcher and US President Ronald Reagan during the 1980’s, supply-side economists regard the end of high inflation and the start of economic expansion during that time as being due largely to their policy recommendations, which included lowering taxes, cutting the non-defence expenditure of central government, and weakening labour union power. At the time, the argument was that by expanding the economy, inflation was checked by the increased demand for money.