Money supply

If you increase the money supply does this lead to inflation?

Surely people have more money, thus more confidence. Thus investors have more confidence.

So they invest more, increasing supply.

Thus the productive capacity increases so we have growth.

The macro equilibrium falls and so printing money causes prices to fall...doesn't it?


  1. Not necesseraly.

    You see, the process of quantative easing was planned to actually reduce the growth rates of price level as it is the one of the main aims of Bank of England. To inject more money into the economy through quantative easing, BoE purchases government securities on the open market, which increases available funds for other banks. Only after that these money are available to usual consumers.

    However, there is a quantity theory of money, which states that there is the positive relationship of overall prices or the nominal value of expenditures to the quantity of money.

  2. 1)Printing money may not increase confidence or even result in the lack of confidence because of the unstable situation of the economy.
    2)Printing money means that there is more money in the economy.If we asume that there is constant amount of the resourses available then the inflation occurs(more money mean that real purchasing power of currency falls therefore nominal prices rise).
    3)Even if we asume that the inflation doesn't occur and that printing money doesn't damage confidence then we should remember that increased investent doesn't mean instant growth of supply but at the same time there is a large increase in AD(because printing money increases the flow of money within the economy) therefore there is demand-pull inflation

  3. Only one thing I would add to the previous comments. Increase in the money supply occurs in the short run while the prospective increase in investment and therefore the increase in the supply side of the economy takes time. Time in which the inflaion will occur. The monetarists argue that money supply can be used to deflate the economy and return it to the sustainable growth rate.