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 economy does not grow or shrink with the amount of money. The economy grows or shrinks with the amount of money that is changing hands.

If everyone with money refused to spend it tomorrow, the economy would shrink down to zero. If everyone started buying twice as much as they normally do and subsequently got paid to produce twice as much as they regularly do, the economy would double. No change in the amount of money supply necessary.