why would printing more bills cause the value to go down? Why wouldn’t prices stay the same?
In: Economics
It only sometimes (though usually) causes inflation. The popular simple explanation (that the value of money is only dependent on its quantity) is wrong, but the principle isn’t terrible. Mathematically speaking the total amount of money spent has to equal the value of everything sold.
The total amount of money spent is the amount of money* times its “velocity” – how frequently people spend their money. The value of everything sold is the product of prices and quantities. So if the quantity of money increases either the rate at which money is spent has to decline or the value of everything sold has to increase – which either means more production or higher prices. The difference matters a lot when it comes to making policy – if production would rise rather than prices (such as during a recession, when there is unused economic capacity) then printing and spending money causes growth, not inflation. And on the other side sometimes printing money doesn’t cause inflation even when we want it to, which happens if the people getting the money don’t spend it.
*Which includes credit, such as bank deposits, as well as bills.
Latest Answers