How_Money_Works_-_The_Facts_Visually_Explained

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Interest rates

cut to 0.25%

Interest rates

raised to 1%

MONEY BASICS

The evolution of money

Scholars in the early 16th century were the first to note

that the abundance of silver coming into Spain from

the New World led to increased prices. Economists

of the 18th-century Classical School believed that the

market would correct for such imbalances, reaching

an equilibrium price by itself. By the early 20th century,

some economists believed that intervention by the

government was necessary to maintain a balanced

economy, arguing that government spending could

boost employment by increasing overall demand.

Hayek’s business cycle

Austrian economist Friedrich Hayek noted a cycle in the

economy, in which interest rates fall during a recession.

This leads to an overexpansion of credit, necessitating

a rise in interest rates to counter excess demand.

Friedman’s monetarism

Milton Friedman argued that governments could raise

or lower interest rates to affect the money supply. Cuts

would stimulate consumer spending; rises would restrict

it and reduce the amount of money in the supply.

BUSINESSES SPEND MORE

With demand rising, firms invest

more, opening more factories and

providing more employment.

ECONOMY IN BALANCE

With levels of investment and production high, and

employment and wages rising, the stimulation of

extra government spending is no longer needed.

MULTIPLIERS

MULTIPLIERS

TIME

REAL GDP

RECESSION EXPANSION RECESSION

PRODUCTION INCREASE

With more people in employment,

consumer spending rises. Increased

demand leads to increased production.

SALES FIGURES

COMPANY

COMPANY

COMPANY

W

GA

ES

OG

O

DS

NI

EV

TS

M

EN

T

MORE MONEY IN THE ECONOMY

How it works

RE

CO

VE

RY

COR

RE

CT

IO

N

$

Employee

paid $100

Spends

$100

Supermarket

pays supplier $100

Supplier pays

employees $100

Employee

paid $100

Saves $50 and

spends $50

Supermarket

pays supplier $50

Supplier pays

employees $50

$

$100 $100

$

$ $50

$50

$

$50

$10 0

HIGH INTEREST

LOW INTEREST

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