Question

Suppose the government of a country wants to achieve long-run growth and they are thinking they can do this by printing money. Is this an effective policy for growth?

Answer 1

Hyperinflation has two primary causes: an rise in the supply of money and inflation demand-pull. The former occurs when the government of a nation starts to print money to pay for its spending. As the money supply rises, prices rise as in daily inflation.

The two go hand in hand, always. The government may continue to print more money, rather than tightening the money supply to avoid inflation. Prices are skyrocketing, with too much currency sloshing around. Once consumers realize what's going on they expect inflation to continue. They buy more now to stop charging a subsequent higher price. The excessive demand fuels inflation. If they stockpile goods and create shortages it is even worse.

Hyperinflation sends the value of the plummeting currency to foreign exchange markets. Importers in the nation are going out of business as the cost of skyrocketing foreign goods. Unemployment is growing with businesses collapsing. Then the revenues from government taxes fall and it has difficulty delivering basic services. The government is printing more money to pay its bills, making hyperinflation worse.

In short, no government can print money to escape a recession or downturn. The deeper explanation for this is that money is just a facilitator of people-to - people exchange, a middleman in a transaction. If goods were able to trade directly with products without a middleman, then we would not need capital. If you print more money you simply affect the terms of trade between money and goods, nothing else.