Neutrality Of Money
Categories: Econ
A central bank prints a ton of money...and what happens? Usually, inflation or hyperinflation.
Why does expanding the money supply lead to inflation? One explanation is the neutrality of money, which theorizes that changes in the money supply is all nominal, and doesn’t actually have any effect on real value in the long run. Maybe for a tiny amount of time in the short-run as everything's adjusting, but...nah. You can’t just create value out of thin air.
More money in the system leads to price increases and inflation, but the real value of the goods remains the same if prices, wages, and inflation all go up. The opposite is true when there’s less money in the system, but deflation isn’t all that common.