The increase in supply for all products generally reduces the demand for the specified product. If the government increases the supply of money in active circulation, than it is analogous to allocating more money to people. That is, the increase in the money supply will make a larger volume available for people to acquire. Additionally, because the exclusivity is severely reduced the value of money will decline. Also, the ability for people to borrow money from banks, and banks from the government is easier and increased (Hill, 2016).
The value of the U.S. dollar will decrease nationally and globally. Moreover, if the supply of goods and services are not growing or has no demand to grow, the purchasing power of the individual is reduced. That is, it will now take more dollars to purchase the same gallon of milk you have always purchased. Specifically, the rate of inflation will increase for gross domestic products, and all imported goods for the average consumer (e.g., citizens). However, the competitiveness of U.S. exports will increase because a reduced U.S. currency value will result in foreign nations being capable of purchasing more U.S. exported goods for the same amount of money previously allocated.
Therefore, Purchasing Power Parity (PPP) is the theory that states in the long-run (i.e., over several decades), the exchange rates between nations should reach equilibrium (Saylor, 2012). That is, the essential cost of goods will have the same value for country A, as it does in country B. Due to the decreased value of the dollar, inflation rates will increase. The exchange rate value will depreciate for the U.S. However, shifting the supply of both money and products, due to demand, the value will equalize.
Reference
Hill, C. W. (2019). International Business: Competing in the global marketplace. New York, NY. McGraw Hill Education.
Saylor Academy. 2012. Principles of Economics. Retrieved from https://saylordotorg.github.io/text_principles-of-economics-v2.0/s33-03-exchange-rate-systems.html
