eli5: How does an economy grow if the money supply doesnt increase in that same year? In gold standard suppose, gold reserves are not increased but economy still manages to grow. How is that possible, how is an economy growing on a stable money supply?

Question

eli5: How does an economy grow if the money supply doesnt increase in that same year? In gold standard suppose, gold reserves are not increased but economy still manages to grow. How is that possible, how is an economy growing on a stable money supply?

In: 339

Answer 1

The money supply isn’t stable. Banks constantly create money by giving out loans. The idea that banks loan out deposits is a myth. Rather there is a legally defined ratio that is allowed between deposits and total loans, but thr ratio is large, you can have a lot of loans for a given amount of deposits, and in practice it is flexible as well.