10. Why cant a country print money and get rich?

If we print more money, prices will rise such that were no better off than we were before. It may also leads to hyperinflation as seen in the case of Zimbabwe. Prices will go up after a drastic increase in the money supply because: 1. If people have more money, theyll divert some of that money to spending. Retailers will be forced to raise prices, or run out of product. 2. Retailers who run out of product will try to replenish it. Producers face the same dilemma of retailers that they will either have to raise prices, or face shortages because they do not have the capacity to create extra product and they cannot find labor at rates which are low enough to justify the extra production. Quantity Theory of Money The approach of classical economists toward money states that the amount of money available in the economy is determined by the equation of exchange: MV=PT Where: M = the amount of money currently in circulation over a set time period V = the "velocity" of money (how often money is spent or turned over during the time period) P = the average price level T = the value of expenditures or the number of transactions

Economists tested the formula and found that the velocity of money, V, often stayed relatively constant over time. Because of this, an increase in M resulted in an increase in P. Thus, as the money supply grows, so too will inflation. Inflation hurts the economy by making goods more expensive, which limits consumer and business spending. According to Friedman, "inflation is always and everywhere a monetary phenomenon". While economists following the Keynesian approach did not completely discount the role that the supply of money has on the gross domestic product (GDP), they did feel that the market would take more time to react to adjustments. Monetarists felt that markets would readily adapt to more capital being available Rather than delving deep into the quantity theory of money. Lets think about a simple example.

Suppose the economy produces a 1,000 units of output. Suppose the money supply (number of notes and coins) = 10,000 This means that the average price of the output produced will be 10 (10,000/1000)

Suppose then that the government print an extra 5,000 notes creating a total money supply of 15,000; but, the output of the economy stays at 1,000 units. Effectively, people have more cash, but, the number of goods is the same. Because people have more cash, they are willing to spend more to buy the goods in the economy. The price of the 1,000 units will increase to 15 (15,000/1000). The price has increased, but, the quantity of output stays the same. People are not better off, and the value of money has decreased; e.g. A 10 note buys less goods than previously. Therefore, if the money supply is increased, but, output stays the same, everything will just become more expensive. The increase in national income will be purely monetary (nominal) If output increased by 5%. and the money supply increases by 7%. Then inflation will be roughly 2%. This is a simplification. For example, in the real world it is hard to measure the money supply (there are many different measures from M0 narrow money to M4 wide money) Also, in a liquidity trap (recession, different printing money may not cause inflation.