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Why does additional population require additional money?

• ZenoArrow 10y ago
  Because deflation is seen as more risky than inflation. In principal prices could drop to stretch the spending power of money, so that the money supply didn't need to increase along with population. In practice this is seen as risky as during the period of transition to lower prices you risk going through a period of economic slowdown and reduced spending power of the population. These problems are especially problematic in a system of globalised trade, as foreign investors can take advantage of the deflationary period to gain further control of local assets. In other words, inflation is required because the world's economy is based on growth, and inflation and deflation are not equal in this scenario. If the world's economy was based on a steady state economic system, then we wouldn't need to create more money.
  • js8 10y ago
    To add to your (correct) answer, world's economy has to based on growth for physics reasons. In the real world, almost all things that we produce slowly depreciate due to entropy. So to even maintain the living standard, you need constant production, and thus constant investment. Deflation doesn't incentivize investment (which is an irreversible decision), so the only alternative is, in the face of risk, (small) inflation.