You are on page 1of 2

10 PRINCIPLE OF ECONOMICS

Principle #9: Prices Rise When the Government Prints Too Much Money.
 When something becomes more widely available, no matter what it is, it’s more
common. And when things are more common, it’s less expensive and easier to obtain.
 Inflation is an increase in the general level of prices in the economy.
 Prices respond to the value of money and when there’s more money available, the
money has less buying powers.
 In the long run, inflation is almost always caused by excessive growth in the quantity of
money, which causes the value of money to fall.
 If you print more money, the amount of goods doesn’t change. However, if you print
more money, households will have more cash and more money to spend on goods. If
there is more money chasing the same amount of goods, firms will just put up prices.

Prepared by:
Sentillas, Eva
Triviño, Ella Jane
BSA 5A
Printing money and national debt
Governments borrow by selling government bonds/gilts to the private sector. Bonds are a form
of saving. People buy government because they assume a government bond is a safe
investment. However, this assumes that inflation will remain low.

 If governments print money to pay off the national debt, inflation would rise. This increase in
inflation would reduce the value of bonds.
 If inflation increases, people will not want to hold bonds because their value is falling.
Therefore, the government will find it difficult to sell bonds to finance the national debt. They
will have to pay higher interest rates to attract investors.
 If the government print too much money and inflation get out of hand, investors will not trust
the government and it will be hard for the government to borrow anything at all.
 Therefore, printing money could create more problems than it solves.

 PRINCIPLE 9: PRICES RISE WHEN THE GOVERNMENT PRINTS TOO MUCH MONEY
 In Germany in January 1921, a·daily newspaper cost 0.30 marks. Less than 2 years later,
in November 1922, the same newspaper cost 70,000,000 marks. All other prices in the
economy rose by similar amounts. This episode is one of history’s most spectacular
examples of inflation, an increase in the overall level of prices in the economy.
 Although the United States has never experienced inflation even close to that in Germany
in the 1920s, inflation has at times been an economic problem. During the 1970s, for
instance, the overall level of prices more than doubled, and President Gerald Ford called
inflation “public enemy number one.” By contrast, inflation in the 1990s was about 3
percent per year; at this rate, it would take more than 20 years for prices to double.
Because high inflation imposes various costs on society, keeping inflation at a low level is
a goal of economic policymakers around the world.
 What causes inflation? In almost all cases of large or persistent inflation, the culprit is
growth in the quantity of money. When a government creates large quantities of the
nation’s money, the value of the money falls. In Germany in the early 1920″ when prices
were on average tripling every month, the quantity of money was also tripling every
month. Although less dramatic, the economic history of the United States points to a
similar conclusion. The high inflation of the 1970s was associated with rapid growth in the
quantity of money, and the low inflation of the 1990s was associated with slow growth in
the quantity of money.

You might also like