Economics

Government Spending Does NOT Create Inflation

The first thing they teach in Microeconomics classes is the idea of supply and demand. Where the supply curve meets the demand curve is where a firm sets the price for a particular good or commodity. If the supply increases, the price goes up. If the demand increases, the price goes up. Et cetera et cetera, so on and so forth.

Anyone with two eyes can immediately tell you that this axiom does not hold true in the real world. If iPhones cost $1,000, why don’t they just make more iPhones in order to drop the price?

Exactly. The law of Supply and Demand is not a hard and fast rule. There are many forces at play in the world that counteract this so-called “law”. Marketing, Positioning, Labor constraints, Labor costs, Materials costs, et al.

Inflation is a phenomenon in Macroeconomics where prices across the board begin to go up. The cause of this is basically that the demand side of the economy begins to bump up against the supply side of the economy. For example, the amount of milk that people are willing and able to buy bumps up against the amount of milk that milk producers are able to supply.

So, if milk prices begin to rise there are essentially two actions a government could take. They could figure out a way to stifle the demand for milk, or they…