Money causes Inflation

Citizenship: Introduction to Economics

About the Unit

• In the Introduction to Economics Unit we will be exploring the following questions:

• Why do we have private property?

• Why do we have money (currency)?

• What is inflation?

• How does money and goods flow between producers and consumers?

• Why are some goods/services more expensive than others?

• How the economy can be measured?

Money causes inflation...

• Inflation is a rise in the price of goods and services which occurs as a result of more money being introduced into the economy

• Money circulates at a constant speed (people are constantly buying and selling things with money)

• If more money is put into the system people have more money with which to buy goods and services

• This results in too much money chasing too few goods, which leads to rises in price.

• Therefore, money causes inflation.

Money circulates at a constant speed

If more money is put into the

system... People have more money to buy goods and services

Which leads to price rises

Therefore money causes inflation

Historical Examples

• 1492 - Christopher Columbus arrives in Americas causing silver and gold to flow into Spain

• 1568 - Jean Bodin argues that the abundance of silver and gold in Spain is the result of sharp rises in the prices of goods.

• 1752 - David Hume states that the money supply has a direct relationship to price level.

• 1911 - Irving Fishcer develops a mathematical formula to explain the quantity theory of money.

• 1936 - John Maynard Keynes says that the speed of money circulation is unstable.

• 1956 - Milton Friedman argues that a change in the amount of money in the economy can have a predictable effect on people’s income.

Summary

• Inflation is a rise in the price of goods and services which occurs as a result of more money being introduced into the economy