Mild inflation to help the economy?

Another suggestion to get the economy rolling again is for central banks to encourage a mild increase in inflation.   Here are one, two articles proposing this.

Let’s look at my favorite economic formula which happens to show the connection between the financial and real economies:.

MV=PQ

where M is the total money supply in the economy, V is the velocity or rate at which money is circulated,  P is the price and Q is the quantity of goods and services being exchanged.

Encouraging inflation would mean an increase in P.  This would lead to an increase in one or both of the variables on the other side – probably the M.  There have been reports lately that banks are not lending out money to the full extent of their balance sheets.  Therefore increasing P would probably help the banks to make more profits.

What’s not clear is how increasing P would lead to any increase in Q. The quantity of goods and services produced depends upon the resource base and the ease with which resources can be made available.

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