Why to govt's "inflate" their currency - money supply expansion explained - economystified.blogspots.com

[economystified]

Read full post at: http://economystified.blogspot.com/2012/04/inflation-part-2.html

There are two types of "inflation." Price inflation and
monetary inflation.

Price inflation occurs when producers slowly creep prices
of their wares up and up overtime.

Its not a good thing in of itself - no inflation is - but
price inflation is usually seen as a sign of a strong economy.
Producers only raise prices in environments where customers have more
to spend, lest they drive away customers and lose business. So if
producers are slowly increasing their prices, that's usually a good
indicator that business is doing well.

So price inflation just sort of happens naturally in
growing economies. And aside from setting price controls, there's
little a government can do about it.

In the last post, I spelled out a scenario where the
supply of currency increases in an economy in the absence of any
actual economic growth.

Because incomes and prices both increase together in this
case, no one's income actually really changes. All entities in that
economy are just as poor or wealthier as they were before the extra
currency was pumped into the system...

This type of inflation is called monetary inflation.

So what causes a government to print money in the absence
of growth, like in the scenario I detailed last time? What would
motivate them in inflate their own money supply?

Adjusting the money supply is one of the very few ways a
government can try to steer its economy. Honestly, it can be a pretty
clumsily way of doing it. There's not a lot of guarantees that it
will work exactly as we want it to....

Continue reading at: http://economystified.blogspot.com/2012/04/inflation-part-2.html