I’m having trouble getting my head around inflation, and I can’t seem to find any credible answers on the internet. I’m tying to find out exactly why printing more money causes inflation !
Perhaps I’m thick, you see I can’t stand the stock standard response I get “ too much money chasing too few goods blah blah blah “ - I need more depth.
So this is what I’ve done, I’ve pasted in a standard example of how printing more money causes inflation off the net - picked it apart and have raised a few questions of my own.
Stock standard example I found on the net :
How Printing more money causes inflation
Rather than delving deep into the quantity theory of money.
Let’s think about a simple example.
• Suppose the economy produces a 1,000 units of output.
• Suppose the money supply (number of notes and coins) = $10,000
• This means that the average price of the output produced will be $10 (10,000/1000)
Suppose then that the government prints an extra $5,000 notes creating a
total money supply of $15,000; but, the output of the economy stays at 1,000 units.
Effectively, people have more cash, but, the number of goods is the same.
Because people have more cash, they are willing to spend more to buy the goods
in the economy. The price of the 1,000 units will increase to $15 (15,000/1000).
The price has increased, but, the quantity of output stays the same people
are not better off, and the value of money has decreased;
e.g. A $10 note buys less goods than previously.
My questions :
Point/Question 1 :
So who are the people who now have MORE CASH , buying the same number of goods ?
And how is that extra money circulating in their hands causing prices to go up ?
Point/Question 2 :
Last time the government increased the money supply, I don’t remember getting
$ 10,000 or more in my account ?
True, cheap credit has been available over the past few years ,
allowing us to loan more than we could earn, but what about now ?
It’s only getting tougher to get loans , so I don’t see how your average Tom , Dick
and Harry gets even a trickle of that excess money supply ?
So if the general public isn’t getting access to the excess money injection,
then how are we “ willing to spend more to buy the goods in the economy “ ?
Anddd if it’s not us who’s doing the spending or receiving the excess money supply - WHO IS ?
Going back to point/question 1, this excess money supply seems invisible to me because
I can’t see who has it or who is getting it, In fact I don’t even roughly know what
they/we/ he /she is doing with it. Who are these people with the money chasing too few goods,
how come we can’t physically see them or notice them pushing prices up with
their new found wads of cash ?
Also, the reaction doesn’t seem as automatic as described in the example above
For Example: Government injects $200 billion ( of money printed out of thing air ) into the economy
Then BAMB, BOOM , KABOOM – Bread that costs $ 4 a loaf has now risen to $ 10 a loaf.
Forgive me if I’m missing a point or two here, I havn’t studied economics and left school
early so don’t judge me lol
Any explanations or thoughts would be greatly appreciated