Inflation and Deflation

How the artificial expansion (and contraction)
of the money supply damages the economy.


Changes in the supply of money creates one of the most disruptive influences in market activity. Learn about artificial changes in the money supply and its effect on the economy.


The artificial expansion of the money supply acts as one of the most damaging influences on an economy. Money, which plays the role of an medium of indirect exchange, provides critical information—via money prices—to all actors in the economic system. Any artificial change in the supply of money distorts that information. As a result economic actors make rational decisions based on flawed information.

Because these artificial changes in the supply of money do not affect all segments of the economy uniformly, they do, ironically, have a broad-based effect on the economy. Because of these artificial changes in the money supply cause rising (or falling) money prices that do not reflect real changes in resource supplies, economic actors inadvertently shift resources to less effective and less efficient uses.

This section of the The Free Market Center provides a background on the influence of money inflation on the mis-allocation of resources. This mis-allocation causes what many referred to as malinvestment – investments made in the wrong place and in the wrong time. Malinvestments causes increased production in one segment of the economy that consumers do not need while at the same time reducing production in areas of the economy that consumers do need.

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