Question

For a while in the 1920s, inflation in some ways benefited the German economy. However, it would not have made sense for Germany’s central bank to steadily continue printing new money as a way of boosting the economy. Why not?

Choose one or more:
A. By increasing wages, inflation tends to make labor too expensive.
B. For inflation to be of benefit, it has to come as a surprise.
C. The government cannot go on printing money indefinitely.
D. Expansionary policy boosts the economy in the short run but not the long run.

Answer 1

D) Expansionary policy boosts the economy in the short run but not the long run.

Step-by-step explanation:

Printing money is an expansionary policy. In the short run it stimulates the economy as people with more money demand more and thus provide incentive for the producers to produce and sell more. This helps shift both aggregate supply and aggregate demand favorably.

But in the long run, the situation changes as continuous money printing increases the money supply too much and the production lag in economy cannot keep up. This may be because the economy is already at the maximum potential production capacity and cannot keep producing more with increased demand backed by increased money supply. This will in the long run destabilize the economy by introducing demand pull inflation.

Therefore, in the long run a mix of policies are adopted by governments which may not necessarily be expansionary as in the long run stability is more important.

Hope that helps.