We often feel bad when we see a poor man begging on the roads. Probably once in a lifetime, a question triggered you that why the government can’t print more money from the note printing machine and give it to the poor people or sort out the problem of national debt? Let us tell you why it can’t do that.
The reason is that printing more money doesn’t increase economic output in any way – it merely causes inflation. Here are some points by Economics Help that will make you understand the reason:
- Suppose an economy produces £10 million worth of goods; e.g. 1 million books at £10 each. At this time the money supply will be £10 million.
- If the government doubled the money supply, we would still have 1 million books, but people have more money. Demand for books would rise, and firms would push up prices.
- The most likely scenario is that if the money supply were doubled, we would have 1 million books sold at £20. The economy is now worth £20 million rather than £10 million. But, the number of goods is exactly the same.
- We can say that the increase in GDP is a money illusion. – True you have more money, but if everything is more expensive, you are not any better off.
- In this simple model, printing more money has made goods more expensive, but hasn’t changed the number of goods.
Doubling the money supply, whilst output stays the same, leads to a doubling in price and inflation rate of 100%.
Here is a video that will make you understand better:
Printing more money would mean the price of commodities soaring up to meet the demands. The amount of raw material available for production will be the same or lesser in time. Therefore printing more money isn’t exactly the solution for increasing the national wealth.