So I understand that an increase in money supply will decrease the value of the dollar. And I know that increased monetary demands for goods will increase the price. I just want to know why is it that more money makes firms increase prices on their goods
In: Economics
When people have more money, they are able to spend more money on goods. If the people who sell goods are not able to produce more to keep up with the increased demand, maybe because the machines and workers in their business are already working as hard as they can, then the business can make more money by raising their prices and still selling everything they produce
More money = more people have money = more people want to buy iPhones = iPhones high demand and can’t keep up = increase prices to lower demand and maximize profit
The main difference between hyperinflation and just very high inflation is the way in which it changes people’s behavior. If you’re in an economy with just high inflation, most of your behavioral changes will be related to your investment decisions – put your money in a savings account, buy bonds, etc instead of keeping cash at home.
In an environment with hyperinflation, it affects your more mundane choices – when you get currency, you immediately try to convert it into a different one since holding currency for even short periods of time has severe economic consequences, money becomes so cheap that people start using it for alternative purposes such as toilet or scrap paper, etc.
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