What can cause prices to increase in an economy?

An increase in money supply can lead to a rise in prices in an economy due to the principles of supply and demand. When more money is circulating, consumers generally have more cash on hand, which can increase their purchasing power. As demand for goods and services rises because people are willing to spend more, this can lead to businesses increasing their prices in response to the heightened demand.

Moreover, when the money supply expands, it is often associated with lower interest rates, encouraging borrowing and further spending. The combined effect of an increase in consumer spending, coupled with potentially limited supply of goods and services, creates upward pressure on prices, leading to inflation. This scenario highlights how monetary policy plays a crucial role in affecting price levels within an economy.