What effect does expanding the money supply typically have on inflation?

Expanding the money supply typically leads to an increase in inflation rates due to the basic economic principle of supply and demand. When more money circulates in the economy, consumers and businesses generally have access to more funds. This increased availability of money can lead to higher demand for goods and services, as individuals and businesses are more willing and able to spend.

As demand increases and outpaces the growth in supply—assuming production of goods and services does not change at the same rate—prices tend to rise. This is because when more money chases the same amount of goods and services, sellers can raise their prices due to the increased competition among buyers for those goods and services. This phenomenon is often summarized by the phrase "too much money chasing too few goods."

In summary, when the money supply expands, it can stimulate economic activity but also create upward pressure on prices, thereby increasing inflation rates. As a result, expansionary monetary policy, which involves increasing the money supply, is often associated with a rise in inflation, especially if not balanced against growth in the economy's productive capacity.