Inflation

Consider a simple economy. It has two people,¬† A and B. And there’s the government (or state) G. Person A’s net worth is $100 in cash, and person B’s net worth is $0. This economy run on fiat money. Meaning, G has the power to print money whenever it feels like it.

Suppose G is concerned about inequality and prints $100 and gives it to B. The amount of stuff¬† in the economy that can be consumed has not changed. What the increase in money supply by $100 does is to raise the prices of stuff. General increase in the level of prices is called inflation. The same amount of goods but twice the amount of money chasing thoe goods. Inflation is therefore 100 percent. Continue reading “Inflation”