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Next, what increases the quantity of money and how? In the United States, the Federal Reserve
Systemand only the Fedcontrols the quantity of money. Therefore the Fedand only the
Fedis responsible for any inflation that occurs in the United States.
Some readers may remember discussions in their macroeconomics courses of demand-pull
inflation or cost-push inflation, which suggest that inflation can be caused by too much
consumer demand or excessive wage agreements with unions. This is mistaken. Rising consumer
demand or wage demands cantransmit inflation into the economy, but not cause it. The cause is
an increase in the quantity of money, and the Fed controls the quantity of money.
(It is true that the Feds control over the quantity of money is not total; other factors such as the
currency ratio and the required and excess reserve ratios influence the quantity of money a little.
But their effect is trivial compared to the Feds control of what is known as the monetary base.
The difference is analogous to that between the tide and other factors in determining the water
level in a bay: while wind-caused waves and boat wakes alter the water level a little over short
periods of time, the level is fundamentally determined by the tide. Furthermore, historical
changes in the currency and excess reserve ratios have largely been a response to changes in the
monetary base; they have not come about independently.)