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When the Government Prints Money
The prices of corn in the economy will increase at the same rate as the increase in demand for corn due to the capacity of the public to purchase two bags rather than one bag of corn. The demand for goods or services will increase because each individual will be able to purchase more products as compared to the situation before the injection of money by the government (Lipsey and Chrystal 579). Inflation will increase in the economy of Tap because the island can only produce one bag of corn for each inhabitant of the island. The scenario illustrates the underlying economic principles of supply, demand, and inflation in the context of both money and goods or services. The supply and demand for corn remained constant before the decision of the government to inject money into the economy. However, the aggregate demand for products will double as soon as each individual has the capacity to purchase twice the products than before (McEachern 612). The increase in demand for corn with the supply remaining constant will have a direct effect on the prices and cause inflation.
It is evident that inflation can cause serious problems for the economy and persistent nature of inflation can create long lasting issues for the solidarity of the economy. There are chances that hyperinflation might also occur that might hurt the economy badly. The government should always take proactive measures to manage the money supply in the economy through which they can attain beneficial long lasting results (Pettinger).
- Lipsey, Richard. and Alec. Chrystal. Economics. Oxford: Oxford University Press, 2015
- McEachern, William. A. Contemporary Economics. Boston, MA: Cengage Learning, 2017
- Pettinger, T. The problem with printing money. 7 July 2017. 24 April 2019.
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