<p>I am not sure how you want to solve inflation but i assume you want to know if  production could be connected with the overall price level in the economy.</p>
<p>Lets take a look at the eqaution of exchange:</p>
<p><span class="math-container">$ M \cdot V = P \cdot  T$</span></p>
<p>Wher M equals money supply, V the velocity of money (how often was one unit of money used), P the price level and T a number for aggregate transactions. However number of transaction are correlated with the goods  produced in the economy. We can thus write the income version of the equation as:</p>
<p><span class="math-container">$ M \cdot V = P \cdot  Y$</span></p>
<p>Dividing by Y verifies your assumption. Given that money supply and circulation speed are constant, higher production decreases the price level in the economy.</p>
<p><span class="math-container">$ \frac{M \cdot V}{Y} = P$</span></p>

CC BY-SA 4.0
2020-09-01T01:23:59.930Z
Velocity is certainly not a constant. This can be validated by looking at time series data.
Brian Romanchuk
CC BY-SA 4.0
2020-09-01T02:07:52.497Z
@Armenthus if there are more transactions wouldn't the velocity of money also be greater?
Sean Taylor
CC BY-SA 4.0
2020-09-01T06:32:06.477Z
@BrianRomanchuk I did not claim that the velocity of money is constant per se. In fact, none of these variables are constant. I tried to make a ceteris paribus consideration. This helps us to identify the influence of Y in this equation. One could also assume that the velocity is growing over time and Y grows over-proportional. This leads to the same result: An increase in Y (in relation to the other variables) does tend to reduce the overall price level in the economy.
Levittstyle
CC BY-SA 4.0
2020-09-01T06:38:12.753Z
@SeanTaylor Please read my answer and the equations carefully. I just explained the first case in which this is not true: V and M can be constant if the price level P decreases. If prices decrease, the velocity (how often was one unit of money used) stays constant even if transactions (i.e. Y) rise.
Levittstyle
CC BY-SA 4.0
2020-09-01T19:28:21.213Z
@Arementhus, you wrote “Given that money supply and circulation speed are constant”, saying “  I did not claim that the velocity of money is constant per se” makes little sense.
Brian Romanchuk
CC BY-SA 4.0
2020-09-01T19:58:40.740Z
@SeanTaylor This is a standard way of interpreting economic equations. Please goolge ceteris paribus mehtod or open a new question about how to interprete economic equations.
Levittstyle
CC BY-SA 4.0
2020-09-02T15:04:42.320Z
“Ceteris paribus” is Latin for all else equal. Creating a lot of output is a drastic change to the economy, so not all else is equal.
Brian Romanchuk
CC BY-SA 4.0
2020-09-03T08:44:05.083Z
@BrianRomanchuk ! ELSE equal. Keep everything constant ELSE the variable Y which influence you want find out. Lets say you make an experiment about how temperature influences plant growth. If you keep changing all other variables (for example location, seasons etc.) you wont be able to affiliate the change in plant growth to the change in temperature or to the other changes you made simultaneously.
Levittstyle
CC BY-SA 4.0
2020-09-03T13:07:36.890Z
You magically have output increase? That’s a standard part of economics textbooks?
Brian Romanchuk
CC BY-SA 4.0
2020-09-03T14:40:46.847Z
In any event, your answer misses the fact that *inflation* is the the change in prices from time t to t+1. If the economy transitions to a new equilibrium at time $T_f$, then if ALL else  is equal, the inflation rate from $T_f$ to $T_f + 1$ will be the same as it was in the initial state.
Brian Romanchuk
CC BY-SA 4.0
2020-08-31T20:27:25.270Z
2020-08-31T20:27:25.270Z
Levittstyle
<p>In the real world, the answer is that anything can happen.</p>
<ul>
<li>If the inflation is associated with a shortage of a key good - e.g., oil supply squeezes by OPEC in the 1970s, or raw food prices for countries with a low weight of processed food in the CPI - bringing more supply in will lower prices.</li>
<li>However, countries can grow in real terms and inflation rise, as seen in the U.S. in the 1970s: <a href="https://fred.stlouisfed.org/series/GDPC1" rel="nofollow noreferrer">link to FRED database.</a></li>
</ul>
<p>The reason for the indeterminacy is straightforward. New output does not magically appear. Workers need to be hired, and quite often there is fixed investment needed for new productive capacity. That hiring and/or fixed investment can make supply bottlenecks worse.</p>
<p>However, the question’s focus on the money supply is not helpful. The velocity of money is unstable, and so one cannot draw any useful conclusions between monetary aggregate growth and inflation on any reasonable forecast horizon. <a href="https://fred.stlouisfed.org/series/M1V" rel="nofollow noreferrer">M1 velocity in the United States.</a></p>

CC BY-SA 4.0
2020-09-02T16:03:07.220Z
2020-09-02T16:03:07.220Z
Brian Romanchuk
<p>If inflation is caused by there being more money to comparison to goods, if you increased production of goods to match the pre-inflation ratios of money to goods, would you effectively solve inflation?</p>

CC BY-SA 4.0
2020-08-31T18:59:54.110Z
What do you mean by "solve inflation"?
Giskard
CC BY-SA 4.0
2020-09-01T02:14:33.053Z
@Giskard balance it out
Sean Taylor
CC BY-SA 4.0
2020-09-01T05:40:40.337Z
What do you mean by "balance it out"? Make inflation zero?
Giskard
CC BY-SA 4.0
2020-09-01T08:46:59.967Z
Also who's "you"? There is no person on earth who can force the economy to make more stuff. Not even the President of the USA.
Criticize SE actions means ban
<inflation>
Could you solve inflation by creating more goods?
Sean Taylor
# Could you solve inflation by creating more goods?

(Asked by: username_0 on 2020-08-31)

If inflation is caused by there being more money to comparison to goods, if you increased production of goods to match the pre-inflation ratios of money to goods, would you effectively solve inflation?

**Tags:** inflation

> **Comments:**
> **username_1**: What do you mean by "solve inflation"?  
> **username_0**: @username_1 balance it out  
> **username_1**: What do you mean by "balance it out"? Make inflation zero?  
> **username_2**: Also who's "you"? There is no person on earth who can force the economy to make more stuff. Not even the President of the USA.  

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## 2 answers

### Answer by username_3 on 2020-08-31. Score: 1

I am not sure how you want to solve inflation but i assume you want to know if production could be connected with the overall price level in the economy.

Lets take a look at the eqaution of exchange:

$ M \cdot V = P \cdot T$

Wher M equals money supply, V the velocity of money (how often was one unit of money used), P the price level and T a number for aggregate transactions. However number of transaction are correlated with the goods produced in the economy. We can thus write the income version of the equation as:

$ M \cdot V = P \cdot Y$

Dividing by Y verifies your assumption. Given that money supply and circulation speed are constant, higher production decreases the price level in the economy.

$ \frac{M \cdot V}{Y} = P$

> **Comments:**
> **username_4**: Velocity is certainly not a constant. This can be validated by looking at time series data.  
> **username_0**: @Armenthus if there are more transactions wouldn't the velocity of money also be greater?  
> **username_3**: @BrianRomanchuk I did not claim that the velocity of money is constant per se. In fact, none of these variables are constant. I tried to make a ceteris paribus consideration. This helps us to identify the influence of Y in this equation. One could also assume that the velocity is growing over time and Y grows over-proportional. This leads to the same result: An increase in Y (in relation to the other variables) does tend to reduce the overall price level in the economy.  
> **username_3**: @SeanTaylor Please read my answer and the equations carefully. I just explained the first case in which this is not true: V and M can be constant if the price level P decreases. If prices decrease, the velocity (how often was one unit of money used) stays constant even if transactions (i.e. Y) rise.  
> **username_4**: @Arementhus, you wrote “Given that money supply and circulation speed are constant”, saying “  I did not claim that the velocity of money is constant per se” makes little sense.  
> **username_3**: @SeanTaylor This is a standard way of interpreting economic equations. Please goolge ceteris paribus mehtod or open a new question about how to interprete economic equations.  
> **username_4**: “Ceteris paribus” is Latin for all else equal. Creating a lot of output is a drastic change to the economy, so not all else is equal.  
> **username_3**: @BrianRomanchuk ! ELSE equal. Keep everything constant ELSE the variable Y which influence you want find out. Lets say you make an experiment about how temperature influences plant growth. If you keep changing all other variables (for example location, seasons etc.) you wont be able to affiliate the change in plant growth to the change in temperature or to the other changes you made simultaneously.  
> **username_4**: You magically have output increase? That’s a standard part of economics textbooks?  
> **username_4**: In any event, your answer misses the fact that *inflation* is the the change in prices from time t to t+1. If the economy transitions to a new equilibrium at time $T_f$, then if ALL else  is equal, the inflation rate from $T_f$ to $T_f + 1$ will be the same as it was in the initial state.  

---

### Answer by username_4 on 2020-09-02. Score: 0

In the real world, the answer is that anything can happen.

* If the inflation is associated with a shortage of a key good - e.g., oil supply squeezes by OPEC in the 1970s, or raw food prices for countries with a low weight of processed food in the CPI - bringing more supply in will lower prices.
* However, countries can grow in real terms and inflation rise, as seen in the U.S. in the 1970s: [link to FRED database.](https://fred.stlouisfed.org/series/GDPC1)

The reason for the indeterminacy is straightforward. New output does not magically appear. Workers need to be hired, and quite often there is fixed investment needed for new productive capacity. That hiring and/or fixed investment can make supply bottlenecks worse.

However, the question’s focus on the money supply is not helpful. The velocity of money is unstable, and so one cannot draw any useful conclusions between monetary aggregate growth and inflation on any reasonable forecast horizon. [M1 velocity in the United States.](https://fred.stlouisfed.org/series/M1V)


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