If Governments use FIAT currency, why do we have inflation?
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We value a fiat currency by how rare it is to have it. The rarer it is, the more we value it.
A healthy economy is generally growing every year. Now if the economy grows but the amount of money stays the same, the more valuable money becomes, as the demand for money increases. If tomorrow you knew that your dollar would be worth more than it is today, then why would you spend it? Now imagine that that dollar will be worth much more if you just keep waiting.
All of a sudden you have people wanting to hold on to money, spending decreases across the board, employees get fired to save even more of this valuable money.
This is a much worse situation than just a small amount of inflation every year. This isn’t the only reason why inflation is a target, but it is an important one.
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