<ol>
<li>new money is created; it belongs to somebody.</li>
<li>that somebody can either save/invest the money, or spend it on consumption.</li>
<li>provided at least some of the money is spent on consumption, the demand for consumer goods increases.</li>
<li>in a competitive market, this increase in demand results in an increase in the price level. (Note that the sellers are not "willingly rising prices" because, in this simple model of competition, sellers take the price a given natural consequence of the interaction of supply and demand).</li>
</ol>

<p><a href="https://i.sstatic.net/AXuAO.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/AXuAO.png" alt="enter image description here"></a></p>

<p>You might also find it interesting to read about the <a href="https://en.wikipedia.org/wiki/Quantity_theory_of_money" rel="nofollow noreferrer">quantity theory of money</a>.</p>

CC BY-SA 3.0
2016-09-27T09:17:13.783Z
"sellers are not willingly rising prices"
This seems like a stretch. While in the mathematical model sellers are indeed price takers the underlying assumption is that this models the equilibrium situation well as there sellers have no incentive to raise prices.
Giskard
CC BY-SA 3.0
2016-09-27T10:06:26.187Z
@densep: your point is a semantic one. If I put a gun to your head and tell you what to do, can you be said to do it willingly? You could argue that you are indeed responding to an incentive of your own free will. But in practice I have imposed upon you a set of constraints that—as for the price-taking firm—reduce your choice set to a singleton and this produces a qualitatively different behaviour. I would describe that behaviour as rational (in the usual formal sense), but not willful (in the less precise, philosophical sense).
Ubiquitous
CC BY-SA 3.0
2016-09-27T10:23:01.417Z
I would like to point out that you could build a different model where price setting is allowed and get the same result. E.g. Bertrand competition.  The point of models is to model reality, where people do set prices, so I do not see why you insist that this does not happen.
Giskard
CC BY-SA 3.0
2016-09-27T10:24:22.480Z
On your second point, describing incentive driven behavior as rational but not willful is something I disagree but cannot argue with, as I am not well versed in philosophy or neuroscience.
Giskard
CC BY-SA 3.0
2016-09-27T10:32:59.993Z
I have been thinking about your definition of 'willing' for a few minutes more and I can only find very vague instances when someone is willing to do something. For example I do not buy things at the store willingly, I do not eat willingly (I do it for the endorphins and the kalories), etc.
Giskard
CC BY-SA 3.0
2016-09-27T14:05:36.930Z
@densep I would say that, again, in Bertrand firms rationally price at marginal cost, but not willingly so. It's not **my** definition, it's **the** definition. Take a look in the Oxford English Dictionary: "Free Will, n. The power of an individual to make free choices, not determined by divine predestination, the laws of physical causality, fate, etc." The key word is power. A monopolist/oligopolist has (market) power and can exercise at least some degree of will, a price-taker has none and cannot. But, again, this is an issue of semantics rather than economics.
Ubiquitous
CC BY-SA 3.0
2016-09-28T01:39:52.433Z
Thanks four your anwer! I have one more question. Can't the goverment just print money and use it to fund the productive sector? then they would have goten money into circulation but also, by funding industries (or something like that) they would have lower the supply price, restituting the equilibrium price to the original one. What prevents them to do so?
P. C. Spaniel
CC BY-SA 3.0
2016-09-28T12:21:40.090Z
@Chop Yes, my answer assumes that the money supply grows faster than the level of output in the economy (this idea can be seen in the Quantity Theory of Money that I linked to). But, one of the main reasons for printing money in the first place is to stimulate demand in a recession where demand is below the level necessary to ensure full employment of economic resources. If demand is already too low to exhaust the economy's supply potential then financing an increase in supply is unlikely to help much.
Ubiquitous
CC BY-SA 3.0
2016-09-27T08:58:10.260Z
2016-09-27T08:58:10.260Z
Ubiquitous
<p>When people buy more, when Government invests more, when companies invest more and when exports are bigger than imports, some other people will gain profit. If they have more money, they will also buy more and so on. The GDP for that country will increase to a level called supraproduction. The economy is overheated and the prices will increase as a psychological response of community and as a need to increase the prices for sustaining a supraproduction. You know that when a company produces more, they will gain economy of scales until a certain point when their production costs will increase. That's why they need to increase the price. Of course, everything is far more complicated than that.</p>

CC BY-SA 3.0
2016-09-27T07:17:16.297Z
There are a lot of different things jumbled together in this answer.
Giskard
CC BY-SA 3.0
2016-09-27T05:23:11.467Z
2016-09-27T05:23:11.467Z
Coman Paul
<p>I'm a physics student who likes economics very much. I'm trying to get a simple explanation for inflation. I hope that there is one that doesn't involve people willingly rising prices. Thank you very much!</p>

CC BY-SA 3.0
2016-09-27T07:15:03.420Z
I am trying to get a simple explanation for gravity that does not involve bodies being attracted to each other.
Giskard
CC BY-SA 3.0
2016-09-27T17:08:06.403Z
Money gets printed, firms confuse more people buying things for a rise in real demand, they eventually figure out people just have more money, and then prices rise.
Kitsune Cavalry
CC BY-SA 3.0
2016-09-27T20:20:39.170Z
@denesp actually in general relativity bodies doesnt attract to each other but space curves itself in presence of matter so everything just "falls" towards everything. You're welcome
P. C. Spaniel
CC BY-SA 3.0
2016-09-27T22:39:06.270Z
@Chop Very nice, thank you. (Not sure about the simple part though.)
Giskard
<macroeconomics><inflation>
Why does an increase in money in circulation increases price levels?
P. C. Spaniel
# Why does an increase in money in circulation increases price levels?

(Asked by: username_0 on 2016-09-27)

I'm a physics student who likes economics very much. I'm trying to get a simple explanation for inflation. I hope that there is one that doesn't involve people willingly rising prices. Thank you very much!

**Tags:** macroeconomics, inflation
> **Comments:**
> **username_1**: I am trying to get a simple explanation for gravity that does not involve bodies being attracted to each other.  
> **username_2**: Money gets printed, firms confuse more people buying things for a rise in real demand, they eventually figure out people just have more money, and then prices rise.  
> **username_0**: @denesp actually in general relativity bodies doesnt attract to each other but space curves itself in presence of matter so everything just "falls" towards everything. You're welcome  
> **username_1**: @Chop Very nice, thank you. (Not sure about the simple part though.)  

---

## 2 answers

### Answer by username_3 on 2016-09-27. Score: 1

1. new money is created; it belongs to somebody.
2. that somebody can either save/invest the money, or spend it on consumption.
3. provided at least some of the money is spent on consumption, the demand for consumer goods increases.
4. in a competitive market, this increase in demand results in an increase in the price level. (Note that the sellers are not "willingly rising prices" because, in this simple model of competition, sellers take the price a given natural consequence of the interaction of supply and demand).

[![enter image description here](https://i.sstatic.net/AXuAO.png)](https://i.sstatic.net/AXuAO.png)

You might also find it interesting to read about the [quantity theory of money](https://en.wikipedia.org/wiki/Quantity_theory_of_money).

> **Comments:**
> **username_1**: "sellers are not willingly rising prices" This seems like a stretch. While in the mathematical model sellers are indeed price takers the underlying assumption is that this models the equilibrium situation well as there sellers have no incentive to raise prices.  
> **username_3**: @densep: your point is a semantic one. If I put a gun to your head and tell you what to do, can you be said to do it willingly? You could argue that you are indeed responding to an incentive of your own free will. But in practice I have imposed upon you a set of constraints that—as for the price-taking firm—reduce your choice set to a singleton and this produces a qualitatively different behaviour. I would describe that behaviour as rational (in the usual formal sense), but not willful (in the less precise, philosophical sense).  
> **username_1**: I would like to point out that you could build a different model where price setting is allowed and get the same result. E.g. Bertrand competition.  The point of models is to model reality, where people do set prices, so I do not see why you insist that this does not happen.  
> **username_1**: On your second point, describing incentive driven behavior as rational but not willful is something I disagree but cannot argue with, as I am not well versed in philosophy or neuroscience.  
> **username_1**: I have been thinking about your definition of 'willing' for a few minutes more and I can only find very vague instances when someone is willing to do something. For example I do not buy things at the store willingly, I do not eat willingly (I do it for the endorphins and the kalories), etc.  
> **username_3**: @densep I would say that, again, in Bertrand firms rationally price at marginal cost, but not willingly so. It's not **my** definition, it's **the** definition. Take a look in the Oxford English Dictionary: "Free Will, n. The power of an individual to make free choices, not determined by divine predestination, the laws of physical causality, fate, etc." The key word is power. A monopolist/oligopolist has (market) power and can exercise at least some degree of will, a price-taker has none and cannot. But, again, this is an issue of semantics rather than economics.  
> **username_0**: Thanks four your anwer! I have one more question. Can't the goverment just print money and use it to fund the productive sector? then they would have goten money into circulation but also, by funding industries (or something like that) they would have lower the supply price, restituting the equilibrium price to the original one. What prevents them to do so?  
> **username_3**: @Chop Yes, my answer assumes that the money supply grows faster than the level of output in the economy (this idea can be seen in the Quantity Theory of Money that I linked to). But, one of the main reasons for printing money in the first place is to stimulate demand in a recession where demand is below the level necessary to ensure full employment of economic resources. If demand is already too low to exhaust the economy's supply potential then financing an increase in supply is unlikely to help much.  

---

### Answer by username_4 on 2016-09-27. Score: -1

When people buy more, when Government invests more, when companies invest more and when exports are bigger than imports, some other people will gain profit. If they have more money, they will also buy more and so on. The GDP for that country will increase to a level called supraproduction. The economy is overheated and the prices will increase as a psychological response of community and as a need to increase the prices for sustaining a supraproduction. You know that when a company produces more, they will gain economy of scales until a certain point when their production costs will increase. That's why they need to increase the price. Of course, everything is far more complicated than that.

> **Comments:**
> **username_1**: There are a lot of different things jumbled together in this answer.  

---

