Readers Question: supposing a government printed more money but only used it to finance the cost of imported goods, what then would be the effect on the domestic economy? supposing the price of these imported goods was the same as before the extra money was printed, there is just a larger quantity of them now.
If there was an increase in the money supply and this was all spent on imported goods then it would not cause inflation. Generally, the supply of imports is considered elastic so increased spending on imports doesn’t really cause inflation. However, the question assumes that you can increase the money supply and direct people to finance only the cost of imported goods. In practice, if the government increased the money supply, you can’t make people use it to just spend on imports. If you increased the money supply, some would be spent on imports, some would be spent on domestic goods.
also same question but exchanging spending on imports with general government spending ie on defense etc. if the public doesnt see the direct effect of this extra printed money how can inflation occur, all they will see is more missiles etc…..
If the government increase money supply and build more missiles then some people will have more money. The firm who produces the missiles will get more income. Their workers will be paid more. In other words if you print money in the economy, it doesn’t matter where the money is spent on. The increased money supply will filter into the economy, devaluing the value of money and causing inflation.
If a Government commanded a firm to make missiles without payment, then the money supply wouldn’t increase. But, if the government printed money to pay for the production of missiles. The national money supply would have to increase.