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So even though with a lag, the economy will come out if this high inflation state. Hence, I would not completely support the fear of the monetarists regarding the high inflation rate state of our economy at present.

Now with a high level of inflation in the economy, if the monetary policy is to reduce the excess money supply in the economy, this would imply a fall in M/P in equation 2 (LM Curve Equation)...

If this happens, M/P will become lesser than L1 (Y) + L2 (i) and this in turn would result in a rise in the nominal interest rates. A rise in the nominal interest rates would mean a reduced speculative demand for money and so a fall in L2 (i). This in turn would make (L1 + L2) fall. With this increase in the nominal interest rate, at the rising inflation rate, the real rate of interest will also inevitably increase...

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