For example, suppose some new super-useful product is invented, and everyone buys this product. If there is only a finite amount of money then people spend more money on this product while they spend less money to some other products, hence it balances out, and there is no growth in terms of money. Of course new money could be created but this would cause inflation?
In: Economics
So there is a thing called [money velocity](https://en.wikipedia.org/wiki/Velocity_of_money). The reason I mention this is that while the amount of currency is finite, each individual dollar gets spent multiple times. A dollar that you give a business will then be used for things like buying inventory, paying an employee, being stored in a bank, etc. etc. Also, dollars placed in banks can be considered as being out of circulation. The amount of currency in an economy isn’t static.
As you have correctly surmised, as new workers enter the market, new products or greater production and consumption capacity, the demand for money increases in an economy.
This is why the money supply is adjusted to accommodate changes in the overall economy (this is the function of the Central Bank). More money does not equal more inflation. Only excessive new money will do that. Adjusting money supply to account for increased economic activity does not lead to inflation – although most Central Banks will target a small amount of positive inflation rather than zero.
Let’s say there’s an economy consisting of you, me, and another(Anthony). You make food, I make clothes, and Anthony makes shelter. There’s $150 between us, $50 each. This money circulates around, accumulates in some hands more than others. You in particular have a nice stash of cash. With that cash, you start making preserves. This increases the value you’re providing because we’re now storing food. The total wealth in our isolated island economy has increased. As such, the value we ascribe to each dollar is greater. What could originally buy $150 worth of goods, can now buy $175. This is called deflation. Now, if we formed an island council and decided to print more money to match pace of innovation, we’d make the money we have less valuable, but the supply more available. If we got a wild hare and decide “more money, more better,” and started printing money like crazy, it would become a problem as we’d devalue our currency faster than innovation and development grew our economy. It would then take more money to buy the same amount of goods previously.
Growth can come from speed at which money circulates in economy. The money collected selling your great new product gets spent, too. You buy the materials to make it, pay your employees who make and sell it. You celebrate your success by throwing a big party for your employees and buying yourself a new sports car. You also need to upgrade to a bigger office and warehouse. Your vendors, employees, landlord are nw flush with money you paid them, so they go and spend it, too, circulating it through the economy.
Money is a placeholder for wealth, and wealth can be created from nothing. If the amount of money printed is offset by economic growth, inflation can be offset. In fact, if more money isn’t printed, deflation will occur.
Let’s say there is a hot dog stand in front of where you work that makes exactly 100 hot dog for lunch each day, and your office gives everyone a $10 lunch allowance. Supply and demand will balance, some people will brown bag it and pocket the $10 instead of spending too much on a hot dog, and an equilibrium point of say $5 a hot dog will be reached.
If the lunch allowance is raised to $15, inflation will occur. People have more money and are willing to spend more, so the same hot dog now costs maybe $7. If instead, the vendor starts making 150 hot dogs, deflation will occur. In order to sell all those hot dogs, the price has go down to entice those who didn’t think it was worth it at $5. And if both happen at once, things will roughly balance out.
Latest Answers