Ninth and tenth principle of economics deals with Money supply by government causes inflation, and why society faces trade off between inflation and unemployment. You will get clarity through “Principles of money supply and inflation”.
Naturally, whether it is inflation or unemployment, fluctuation in the short or long-run is a part and parcel of any dynamic system. Here too, you will realise how short-run trade-off between inflation and unemployment is a general outcome of business cycle.
Logically, a perfect equilibrium in any economy regarding demand and supply can’t be possible or seems too hypothetical. Then, how could be prices of any commodities ever be stable or unemployment can not be out of control?
List of basic principles of economics
1.People face trade offs.
2.The cost of something is what you give up to get it.
3.Rational people think at the margin.
4.People responds to incentives.
5.Trade can make everyone better off.
6.Markets are usually a good way to organize economic activity.
7.Governments can sometimes improve economic outcomes.
8.The standards of living depends on country’s production.
9.Prices rise when the government prints too much money.
10.Society faces a short run trade offs between inflation and unemployment.
“Prices rise when government prints too much money. And, society faces a short run trade off between inflation and unemployment”.
Practically speaking, no economic system progresses over the smooth surface nor free from trade-offs but it is bound to experience many twists and turns in the process of development.
Sometimes, outcry over unaffordable prices holds the prominent place of daily newspapers, or issues of unemployment becomes the cause of election loss. Meantime, prized scholars hold their nerves to sail through choppy waters with ideas of solutions.
So, Understanding economic interactions that everyone participate is necessity to ensure comfort and ease of life. Short-run trade-off between inflation and unemployment is also a widely acknowledged assertions that you are going to learn here.
Idea of trade-offs in our day-to-day economic activities
Being a rational creature, it is too difficult to ignore the reality that one needs to give up something you also like in order to gain what you aspire most. So, trade-offs are inevitable things we have to face while exercising economic choices. Similarly, even at the macro or system level, no one can bypass it.
Why do inflation and unemployment become short-run trade-off?
Whenever the rate of unemployment overpowers the bearing capacity of society as whole, authority in power takes risk of inflation to pump or inject extra money in productive activities.
Simply, firms pay more money to hire factors of production needed to produce more. In the process, more people gets job opportunities they desired desperately.
Meantime, with extra injection, prices of commodities remain high for short period of time. In this way, although people got jobs they need, the commodities they are going to purchase will also cost more.
According to various renowned scholars of economics, it is inevitable short-run trade-off due to periodic fluctuation in the business cycles of any system.
Last words on trade off between inflation and employment,
“Society faces a short-run trade-off between inflation and unemployment” is the last principle of economics that I have discussed here. It will help you to learn why and how people face trade-offs between things that they need most.
Prices rise when government prints too much money — principles of money supply and inflation
Why do most of the economists agree that the prices rise and money supply have positive correlations. It is not surprise but customary that the prices rise when the government prints too much money.
Understanding price rise or inflation
Generally, prices rise as per the demand and supply for commodity in the given market. If there is undersupply or overdemand for any commodity, the prices of respective commodity will shoot up in the same degree of demand and supply. Or, in case of oversupply or poor demand, same will crash badly.
Apart from the demand and supply, there is a other reason too that might affect the rise and fall of the prices of given things in market. Money supply by governments is no less effective to escalate the respective prices.
More precisely, when the given product doesn’t carry the actual cost but much more due to various reasons, we label it as inflation.
For layman’s language, if there is inflation, product you interested displays higher level of price than it should have as per inputs across the economy.
Examples of printed money by governments
What does printed money mean and how does it affect the prices in economy? Undoubtedly, it is subject of thoroughly investigation.
Sometimes, government prints too much money either to boost economic activities or consumption by people. For example, in Zimbabwe between 2007- 09 and during first world in Germany, the prices of commodities shot up abnormally due to too much printing money by governments.
Recently, in the post-covid period, most of the governments either to put extra money in the hands of common people or to bailout firms in crisis, decided to print money. Consequently, inflationary phenomenon was experienced in these regions in terms of consumer as well as durable goods.
Rational behind Understanding relations between prices rise and money supply by governments
So, it is general phenomenon that whenever governments opt to print money irrespective of reasons, it is too hard to tame the spiking prices of commodities in given economies.
Right from the word go, economists across the world can’t argue against the prices rise when governments opt for printing money.
In this way, we can understand the importance of relations between prices rise and money supply because of the degree of impacts the outcomes have.
This is all about the principles of money supply and inflation. Here, I have explained the ninth and tenth principle of economics in the detailed manner.
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