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

Imagine the economy as a wheel. The wheel has a certain number of spokes, and you stand nearby and count the amount of times a spoke touches the ground in a given timeframe. You can increase this number by just making the wheel turn faster. The amount of spokes stays the same, but the amount of times any specific point around the wheel meets a spoke is increased. The economy works similarly. When the economy grows, what it really means is that money is moving around much faster. Each actor in the economy holds on to their money for a shorter amount of time, but in return they get more money total (because the wheel is spinning faster).