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

Economic growth comes from the velocity of money — how fast it changes hands.

You have $100. You might just keep it in your pocket and it doesn’t do anything.

Or you might buy a paid of shoes with your $100. And the shoe store owner takes his wife out for a $100 date night. And the chef spends $100 on a new knife. And the knifemaker spends $100 on swimming classes for his kid. And the swim instructor spends $100 on getting her hair cut. And the salon owner spends $100 on a new sign. And the sign maker spends $100 on…

So $100, changing hands 7 times created $700 in economic activity.