Probably a naive question but. How does the total amount of money in an economy increase?
Answer:
Great question
One example.
Total money increases by a scarcity of resources pushing prices up.
A run on gold will make gold futures go up: nothing is bought, the futures market is spurious in this respect: but it does generate wealth for the people who invest in the futures market. This money gets invested elsewhere.
The future's market is a glorious example of money generation with nothing to show for it: human confidence in markets that doesn't exist can become a tangible commodity.although it does seem very counter-intuitative..however you look at the futures market and it's size: allot of the missing money that suddenly comes into existence comes from that..
Money can just appear as well: The Duke of Westminster has six billion pounds in wealth he has never realised.it is in family owned property he has never had to mortgage (keeping it out of the hands of the speculators on the markets)..if he were to do this: that's a lot more money in the pot for other people to play with.
Silly other method: currency exchanges: if it is 1.2 then 1.3 and you bought a billion at 1.2, you make a hundred million..this happens at a global level, whole markets are effected.
Lastly, the government can release new money in a variety of different ways: bond release is very complicated, new money gets printed etc., ...
The earning and paying of interest generates money.
The money supply is tweaked as needed to limit inflation and control unemployment to prevent a recession. The Fed used to have goals for the growth of the money supply, but they recently stopped doing that. Right now it stands at 7.8 trillion, although only about 1.2 trillion of that is actual cold hard cash. Most of the time the 1.2 trillion in cash gets handed around in circles. but the 7.8 trillion (includes savings accounts, investment banking balances, even euros that make it to the US) can grow.
More importantly is the question "what mechanism does The Fed use to distribute new money?" Ben Bernanke doesnt stand on a street corner in New York and throw dollar bills in the air to increase the money supply. To do this they print more money than is needed to replace the old bills, and give the excess bills to one of the twelve banks in the Federal Reserve, and these special banks loan the money out to other banks. I suspect that to shrink the money supply they would simply have some banks satisfy some of the loans, though I don't know this.
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