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
I describe it like this. Imagine 5 people have 5 dollars each. If they each spend their $5 in a year and make $5 they get $5 worth of stuff but their net worth doesn’t change. Now imagine they spend and make their $5 twice in a year. They each get $10 worth of stuff. There’s still only $25 worth of money in the system. Not make it 4x a year. Everyone gets $20 of stuff and the system is still only $25 net. And so on.
What really matters in a system is how many times each dollar is spent.
This is also why the wealthy are actually more damaging to a system than people realize. The poor have to spend each dollar as it comes in. And as they do the whole system gets richer. The wealthy can hold and hoard those dollars and everyone else makes less.
Latest Answers