Topic > Economic Development Case Study - 1082

A third source of capital besides profit and taxes is simply the creation of capital through credit or money printing. The danger of creating capital through the creation of extra money, however, is the risk of inflation. An increase in the money supply immediately reduces the value of money and increases the price of market goods as the value of money is questioned by people. Confidence in the newly made money may be lost and prices may rise, especially if equilibrium or equilibrium in the market takes longer to reach (80). However, Lewis considers this danger to be justified if the purpose of creating new money is to create new capital for investment; the resulting inflation will be “self-destructive” and could even lead to a reduction in prices (79). By investing the newly created money, production and output increase. Capital creation, therefore, leads to greater inputs and investments which subsequently increase production and lower prices. While inflation through money creation temporarily reduces the incomes of others, it increases profit and production until equilibrium is reached (78). Therefore, to avoid panic and price increases, a smaller capital-income ratio, or production time, is preferred compared to the initial investment. If it takes too long to increase production and the output needed to overcome the price increase and reach equilibrium in the supply and demand of the goods produced, inflation will not be reduced. In this case, the quantity or supply of consumer goods will be lacking