0
$\begingroup$

Why can't we just print money to build national infrastructure services such as an additional hospital for the NHS? This would create growth, allowing more doctors and nurses to come through but more importantly create additional bed space.

Kind regards

$\endgroup$
0
$\begingroup$

Because increasing money supply will eventually lead to inflation. Consider standard monetary model:

$$MV=PY$$

Where M is the money supply, V velocity of money, P price level and Y real GDP. Velocity of money can be thought of as constant - it’s especially the number of times one euro is used. Moreover, real output can in short run respond to money supply but in the long run money is neutral. Hence when you increase M only thing that changes in the long run is P. You are left with the same output just with higher prices.

Now this simple monetary model is oversimplified- in more modern models it’s expected money supply what matters but the main message stays same.

Also note that in the short run money is not neutral and monetary expansion can boost output but the channel is not really through public investment but through the fact that it helps to put “grease” on the wheels of economy in presence of sticky wages. Hence it might make sometimes sense to just print new money and buy government bonds which will fund also infrastructure or hospitals etc. But most economists believe it has to be done carefully and preferably during recessions.

$\endgroup$

Not the answer you're looking for? Browse other questions tagged or ask your own question.