Money is subject to supply and demand rules, like other products. The fact remains if the money is put in circulation, someone will end up holding that money. That person then has the capacity to buy more stuff than they would otherwise. But the market is in competition. So let's say that person buys half the beer on the market with that extra money; that means there's only half of the beer left than there would normally have been.
You want a beer, and so do a whole bunch of other people. But now, there's not enough beer to satisfy everyone. And the person selling the beer knows this. So they raise the price of their beer so that you need more money to buy the beer. So your dollar, relative to the beer you wanted to buy has just gone down. (Say you had $1.50 and the beer went up from $1.00 to $1.50) - Your $1.50 used to buy 1 1/2 beers, but now buys only 1 beer. So relatively to the beer, your money is worth less.
This is a simple example, but it's the same with complex economies. So whenever the government prints up more money than there is growth for demand of the money, it creates inflation.
2007-01-17 05:35:20
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answer #1
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answered by Anonymous
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Money creation is tied to the economy's productive capacity -- this occurs because in order to take out a loan (which is where money is created), a person or business has to become qualified by showing income, and income is more or less a measure of productivity. In particular, businesses generally borrow money specifically to increase their production ability.
That's a good thing, because if you significantly increased the amount of money in the economy, but not its production, then too much money would be chasing too few goods. The result, inflation -- as people with money bid up prices of scarce goods. At street level, that means business owners would keep finding that they can crank up prices and still sell their wares.
2007-01-17 14:08:22
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answer #2
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answered by KevinStud99 6
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Because there would be more money relative to the amount of goods and services being produced in the economy. That lowers its value. Inflation happens.
2007-01-17 13:15:03
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answer #3
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answered by ttfreitas 2
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it will affect the supply of money, in which a shift increase in the supply curve will lower the value of the money.
in simpler terms, graphite and diamonds are both made from the same element, however graphite is more abundant than diamonds, and diamonds are much more valued than graphite. look at the price of a diamond ring and the price of a pencil
2007-01-17 15:30:45
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answer #4
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answered by Kev C 4
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