The Free Market Center
The Free Market Center
Inflation - Shoe Production Increases
(Increasing Money Supply)
Shoe Production Increases | 2.00%/Month |
Wheat Production Fixed | 0.00%/Month |
Money Supply Increases | 0.50%/Month |
In this scenario shoe production increases while the money supply steadily increases.
Because shoe production increases, shoe sales increase, as you would expect. Shoe dollar prices, however, rise when, based on production increases, you would expect them to decline. This gives evidence of the countervailing influence of the growth of money on dollar prices.
Dollar prices for wheat also give confusing signals. They rise while production remains flat.
The direct exchange relationship behaves as you would expect, given an increase in shoe production.
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With only two examples we begin to see the disruptive effects money growth has on dollar price signals.