Understanding Prices and Inflation
How the government decides the value of money -
The government sets the value of money by the amount it pays for things, such as soldiers.
For example, if the government pays soldiers $50,000 a year, that helps set the value of money.
No matter how many soldiers the government hires or how much money it spends, the value of money stays the same as long as it keeps paying soldiers the same amount.
What happens when the government changes how much it pays for things:
If the government starts paying soldiers $55,000 a year, it will change the value of money and raise prices by 10%.
The government would have to keep increasing how much it pays soldiers each year to make prices keep going up each year.
Inflation and how it's affected by the government's decisions:
Inflation is when prices keep going up over time.
MMT separates the idea of price level (how much things cost) from inflation (how fast prices change).
How much the government spends affects the price level, while interest rates (controlled by the central bank) affect inflation.
When the central bank raises interest rates, it can actually make prices go up more, which is the opposite of what it's trying to do.
Interest rates and how they affect wages:
Higher interest rates can make wages a smaller part of the total income in the economy.
If wages are tied to the general price level, then raising interest rates can make wages and prices go up faster in a cycle.
But if interest rates are kept at 0%, this cycle doesn't happen.
In short, the government and central bank have a big influence on the value of money and inflation. Their decisions affect how much things cost and how fast prices change over time.