According to economic theory, what is the relationship between money supply and goods?

The relationship between money supply and goods is rooted in the fundamental principles of supply and demand within the economy. When there is an increase in the money supply without a corresponding increase in the availability of goods and services, more money is effectively "chasing" the same quantity of goods. This imbalance creates upward pressure on prices, leading to inflation.

Inflation occurs when the purchasing power of money decreases; that is, as there is more money in circulation, consumers are willing to spend more for the available goods, which can drive prices higher. This phenomenon illustrates the critical role that money supply plays in the economy and how it interacts with the overall supply of goods.

Understanding this dynamic is crucial for economic analysis, as it underscores the importance of managing money supply levels to stabilize prices and maintain economic equilibrium. The other options might misrepresent the role of money in the economy or imply relationships that do not directly correlate with established economic theory.