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Mark is not way off. Psychology and expectation is a big part of economics, but not all. Governments don't "increase the money supply by vast amounts daily". I dunno where you got that. They increase the money supply as part of monetary policy to counter short term "crowding-out" effects of fiscal policy and to meet money demand. Inflation is thus the long term effect of short term monetary policy. In short: gov spending (fiscal policy)>increase in money supply and interest rates>business spending less because of that (crowding out effect)>monetary policy to increase money supply to meet money demand>interest rates drop.
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