Inflation

1. Why Countries Like to Issue More Money to Develop the Economy

1.1. How Much Money Needs to Be Printed?

According to the Fisher equation: quantity of products * product price = money in circulation * velocity of circulation.

Here, MV=PY is a quantity identity. To use it to explain the causal relationship of inflation, additional assumptions about the velocity of money, real output, money demand, and so on are required.

Suppose there are 10 products this year, each priced at 1 yuan, and the velocity of circulation is 2. Then the money in circulation is 10 / 2 = 5, meaning the country only needs to print 5 yuan.

If the number of products increases to 20 and each is still assumed to cost 1 yuan, then 20 / 2 = 10 yuan needs to be printed.

1.2. Why Can’t Too Much Money Be Printed?

What if 100 yuan is printed?

Product prices will rise: 100 * 2 / 20 = 10 yuan. This is inflation.

So what happens if I print 100 yuan? Product prices rise: 100*2/20=10 yuan. This is inflation, so money cannot be printed arbitrarily.

1.3. Why Can’t Too Little Money Be Printed?

If no money is printed, then when the quantity of products rises, product prices instead fall. This is deflation.

1.4. Why Can Moderate Inflation Promote Economic Development?

Moderate and stable inflation can sometimes coexist with normal growth in demand and a lower real debt burden, but this does not mean that “rising prices necessarily promote production and consumption.”

Excessively high or unstable inflation brings obvious costs.

References

How Does a Country Print Money? - Bilibili