Readers Comment. Why doesn’t the Bank of England just print the money instead of borrowing the money? Show
Printing more money doesn’t increase economic output – it only increases the amount of cash circulating in the economy. If more money is printed, consumers are able to demand more goods, but if firms have still the same amount of goods, they will respond by putting up prices. In a simplified model, printing money will just cause inflation. Video explanation How printing money causes inflation – Example
Doubling the money supply, whilst output stays the same, leads to a doubling in price and inflation rate of 100%
Problems of inflationWhy is inflation such a problem?
Printing money and national debtGovernments borrow by selling government bonds/gilts to the private sector. Bonds are a form of saving. People buy government because they assume a government bond is a safe investment. However, this assumes that inflation will remain low.
Hyperinflation in Germany during the 1920sInflation was so bad in Germany that money became worthless. Here a child is using money as a toy. Money was used as wallpaper and to make kites. Towards the end of 1923, so much money was needed, people had to carry it about in wheelbarrows. You hear stories of people stealing the wheelbarrow, but leaving the money. Printing more money is exactly what Weimar Germany did in 1922. To meet Allied reparations, they printed more money; this caused the hyperinflation of the 1920s. The hyperinflation led to the collapse of the economy.
Hyperinflation also occurred in Zimbabwe in the 2000s. Printing money and the value of a currencyIf a country prints money and creates inflation, then there will be a decline in the value of the currency.
Value of one German Mark to US Dollar 1922-23 Hyperinflation in Germany causes a rapid fall in the value of the German mark to the dollar. In a period of hyperinflation, investors will try and buy a stable foreign currency because that will hold its value much better. Real Life example of Money Supply and InflationIn a recession, with periods of deflation, it is possible to increase the money supply without causing inflation. This is because the money supply depends not just on the monetary base, but also the velocity of circulation and the willingness of banks to lend. For example, if there is a sharp fall in transactions (velocity of circulation) then it may be necessary to print money to avoid deflation, In the liquidity trap of 2008-2012, the Federal reserve pursued quantitative easing (increasing the monetary base) but this only had a minimal impact on underlying inflation. This is because although banks saw an increase in their reserves, they were reluctant to increase bank lending. However, if a Central Bank pursued quantitative easing (increasing the money supply) during a normal period of economic activity then it would cause inflation. In 2020, quantitative easing was pursued and a year later, inflation in the US rose. (though inflation also rose due to higher oil prices) Related
Last updated: 26th July 2022, Tejvan Pettinger, www.economicshelp.org, Oxford, UK Why does printing too much money causes inflation?When we print money, the supply of money increases, demand for goods increases. If the supply of goods stays steady, but doesn't increase in line with demand, then prices increase. What you bought with $100 yesterday costs more than $100 today.
What happens when economy grows too fast?A fast-growing economy is desirable so long as that growth rate is sustainable. However sometimes the economy can grow too fast. In economics this is called "overheating". Overheating is when the economy reaches the limits of its capacity to meet all of the demand from individuals, firms and government.
What will happen after hyperinflation?If hyperinflation continues, people hoard perishable goods, like bread and milk. These daily supplies become scarce, and more expensive, and the economy falls apart. People lose their savings as cash loses its value.
What is known as hyperinflation?It refers to a situation where the prices of goods and services rise uncontrollably over a defined period of time. In general, the term is used when the rate of inflation increases at more than 50% a month. Typically, hyperinflation is triggered by a very quick growth in the money supply.
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