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?

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Answer 1

There are two (relatively) simply answers to this.

One is that the value of money – what you can exchange it for – goes up.

Imagine it costs me £100 to produce a computer chip. I discover a way of making the same chip for £50. So I can now produce and sell twice as many chips for the same £100.

There are more goods being produced, so the economy has grown, but there’s no more money required.

The other is that the “velocity” of money goes up. Money moves around the economy faster.

This is easiest to imagine with physical money. I get paid £100, I wait two day then go and spend it. The person I gave it to waits two days and then spends it. So £200 worth of stuff has been bought in four days.

Now imagine that I spend that money the same day I get it. And the person I give it to spends it the next day. And the person they give it to spends it the next day. Now instead of £200 of stuff being bought in four days it’s £400.

So you can see that the amount of stuff that is actually exchanged, and produced, in an economy is not completely fixed by the supply of money.