What would happen if a country tried to ban price rises while also printing lots of money?

Question

What would you expect woould happen if humans/states tried to ban price rises on the 100 most purchased products while also printing lots of money (computerised bank credit) that pays for a huge tax cut?

Or what if instead our government fixed the problem of high property prices by effectively banning all from owning more than one property?

Answer 1

An increase in the money supply with the non-existence of inflation, or a lack of any increase in the general price level of the 100 most purchased products, would result in the purchasing power of each individual to grow. This would increase the living standards of the general population as, with a tax cut, the discretionary income available for consumption for each individual would increase. This would increase the confidence of the public and stimulate economic growth. With no price rises, the only way firms will maximise their profits is to optimise the quantity of products they sell. This increased supply may in fact cause prices to fall.

By banning the rights to ownership of secondary housing, the property market would cool to a certain extent but there are numerous other factors which must be analysed in real estate economics.

Firstly, in recent years, the number of households has increased due to the ageing population within the UK, the factor of migration and the rising separation and divorce rates. This has caused a boost in demand for housing which simply has not been met by the restricted supply of housing due to over-regulation of construction and vending of property. This has caused demand-pull inflation which has pushed the prices of housing right up.

Also the buy-to-let craze of recent years has meant that large asset-holding companies and private individuals can have hundreds of houses on their books which obviously withdraws them from common sale within the market. This restricts supply which of course drives the prices up for the properties which do remain on the market for open sale. This would, of course, be prevented if the ban you suggest was implemented.

Another element would be that, with incomes increasing, especially in the capital, there is a greater demand for houses in the top range of the market. This has pushed prices up for these £1million+ properties and other mid-range properties have risen in price also to fill the gap.

Anyway, what with a number of other factors, banning second and extra homes would not cause a slowdown or decrease in the market like you would expect. Also I never think this will happen as people would simply buy abroad and the government would not want such a leakage of consumption to go on housing abroad when they could keep such equity within the UK.

I hope this has helped answer your question.

Answer 2

Pretty much whenever the government implements price caps or purchase limits, a black market will develop to get around these non-market restrictions. Black markets may trade the limited goods for higher prices (to those who were unable to get the shortaged goods at the capped price), or retailers may auction off coupons that would make a customer a "preferred customer" (i.e. doesn't have to wait in line, guaranteed a good, but has to pay more: an illegal price increase). Because demand has increased, the market wants higher prices, and with price fixing, the market will attempt to come up with ways to subvert the government interference.

Even without a black market, fixing prices while causing high amounts of inflation would simply mean most businesses would either go out of business or leave the country (where they could charge higher prices). Printing money is not bad just because it means prices will increase, it's bad because it hurts people who save their money. If you have $1000 in your bank account and all of the sudden tomorrow $1000 can only buy you a candy bar, that's really bad for you.

Inflation of this speed is known as hyper-inflation, and having a higher-than-normal inflation rate can cause people to lose confidence in their economy, government and country, which will naturally lead to adverse consequences for that nation.

Answer 3

Well, there would be a shortage of those 100 goods. The demand for all goods would shift to the right due to the monetary interjection. Creating a greater shortage of the good. The price of land would go way down in your second scenario. But, it would have a great cost. It would cause us to have less food.

Nathan(A level econ student) what are you talking about raising living standards? How does this raise living standards? People would stop making things for others in this situation. At least, to a certain degree. Prices have nothing to do with living standards. They are nominal variables, not real variables. Living standards rise when productivity rises. Price controls will not raise living standards. Anyone with basic economic background should know this. Where did you get your A? Community college?

Answer 4

You would expect one main thing to occur:

1. Demand Deposit balances would increase. According to Keynesian doctrine, the increase in the money supply results in an increase to Aggregate Demand (the demand for all goods in the economy). However, this only results in shortages - Aggregate Supply will not increase to meet the demand. The only way to increase AS is through productivity increases (through increasing capital). If there are no increases in prices (which would naturally result if demand increases), then entrepreneurs have no profit incentive to enter the markets and produce more goods. Essentially, the people have more currency, but not more goods/services. If there are 100 chickens in the economy available for $2 before the increase in the money supply, there will still be only 100 chickens after. The standard of living remains the same. Only the bank balances (or the nominal amount held as currency) increases. Of course, since everyone has money, budgetary constraints are no longer factored into demand functions, which promptly go through the roof. Shortages and long lines show up, because there is no method of resource allocation available. (That's the biggest function of prices - they show firms where to invest their resources, and whether they are allocating their resources efficiently.)

Answer 5

Those who mentioned the gold standard are incorrect. The gold standard was abandoned by the US in 1933, after a number of European countries. This caused most of the world to abandon it as well. We can't print more money to give to other countries because it devalues as there is more in circulation. Just like anything else - if there is more of something, it is worth less. For example, take diamonds. They are very valuable because DeBeers and the diamond cartels in the world control distribution. There are vast stockpiles of diamonds in south Africa and other parts of the world. If they were all sold rather than being held, there would be a huge glut of diamonds, and the prices would fall dramatically. As it stands, they remain valuable because of a limited supply. The fact that it is artificially limited is of no consequense. I'm not sure what grade you teach, but you might moderate a discussion about other ways to help poor countries. One of my favorites is to eliminate farm subsidies as they stand, and instead the US could pay farmers for excess crops which they would give to poor countries. Currently, the US pays farmers to not grow certain crops, in order to control the price of those crops. Coincidentally, most of the largest collectors of government farm subsidies are US Congressmen. That's one of the reason that they will never go away.

Answer 6

Banning price rises is similar to what Robert Mugabe is doing at the moment in Zibabwe. He enforced price reductions, of 50%, on many goods. He thought it would stop inflation. (Inflation is the devaluing of currency - if you can buy more stuff with the same amount of currency, it is worth more, so inflation stops.) It isn't quite working out for him though!

Answer 7

It would be reminicsent of what happened to germany in the 1930's and what is presently happening in Zimbabwe, the economy will go into overdrive triggering hyperinflation.

Answer 8

Get a history book and read what happened to Germany and/or Japan after WWII and you will find out.

Answer 9

sweet - we'll all be driving Lamborghini's!

seriously though....

there would be shortages of everything. you'd be in line for days to buy gasoline.