<p>Economy could continue on working. Prices would eventually adjust. As you mentioned in your question this would lead to perpetual deflation.</p>
<p>That would make unemployment unnecessarily high during depression but there is no conventional growth theory that would require extra money supply.</p>
<p>Economic growth (in per capita terms) is dependent on technological growth, savings rate, investments in human capital and potentially some other factors like technology spillovers from trade or learning by doing (see Acemoglu Introduction to Modern Economic Growth 2nd edition).</p>

CC BY-SA 4.0
2022-04-17T17:42:44.067Z
Wouldn't the deflation stifle investment too much, paralyzing the economy?
EmmanuelMess
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2022-04-17T19:09:41.340Z
@EmmanuelMess no deflation is only problem in short run during recessions. In expansions deflation can be even healthy for the economy sometimes and in long run it has no effect other than the short run effect during recession making it worse. In a long run what happens to price level does not matter for economy, long run output depends on growth society’s capability to produce goods and services
1muflon1
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2022-03-04T10:35:57.073Z
2022-03-04T10:35:57.073Z
1muflon1
<p>My intuition tells me this would absolutely limit growth. Trade and all types of borrowing including personal loans, mortgages, and interest rates on credit cards would be seriously limited.</p>
<p>From the standard monetary equation, the only way to raise the standard of living would be through deflation (a decrease of the average price of goods during the year).</p>

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2022-03-04T09:58:29.413Z
According to the 'long-run money neutrality' hypothesis, your intuition is wrong. Economists have not been able to test your exact experiment for obvious reasons, however empirically there are several papers finding support of the long-run money neutrality by reporting: No correlation between inflation and growth. Money policy stimulation of the economy is therefore by many modeled as a short-run phenomenon, allowing policymakers to boost the economy in the short run only.
Jesper Hybel
<money-supply>
How would the economy work in a world with strict money supply and where none shall be created?
Kermit
# How would the economy work in a world with strict money supply and where none shall be created?

(Asked by: username_0 on 2022-03-04)

My intuition tells me this would absolutely limit growth. Trade and all types of borrowing including personal loans, mortgages, and interest rates on credit cards would be seriously limited.

From the standard monetary equation, the only way to raise the standard of living would be through deflation (a decrease of the average price of goods during the year).

**Tags:** money-supply
> **Comments:**
> **username_1**: According to the 'long-run money neutrality' hypothesis, your intuition is wrong. Economists have not been able to test your exact experiment for obvious reasons, however empirically there are several papers finding support of the long-run money neutrality by reporting: No correlation between inflation and growth. Money policy stimulation of the economy is therefore by many modeled as a short-run phenomenon, allowing policymakers to boost the economy in the short run only.  

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## 1 answers

### Answer by username_2 on 2022-03-04. Score: 1

Economy could continue on working. Prices would eventually adjust. As you mentioned in your question this would lead to perpetual deflation.

That would make unemployment unnecessarily high during depression but there is no conventional growth theory that would require extra money supply.

Economic growth (in per capita terms) is dependent on technological growth, savings rate, investments in human capital and potentially some other factors like technology spillovers from trade or learning by doing (see Acemoglu Introduction to Modern Economic Growth 2nd edition).

> **Comments:**
> **username_3**: Wouldn't the deflation stifle investment too much, paralyzing the economy?  
> **username_2**: @EmmanuelMess no deflation is only problem in short run during recessions. In expansions deflation can be even healthy for the economy sometimes and in long run it has no effect other than the short run effect during recession making it worse. In a long run what happens to price level does not matter for economy, long run output depends on growth society’s capability to produce goods and services  

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