What is MONEY SUPPLY?

What are the benefits AND disadvantages of a money supply increase?

• I'm trying to understand how money growth in the U.S. will impact the prices of domestic assets (like houses, stocks& bonds and such). Furthermore, how does an increase in U.S. money supply affect prices in foreign countries? Thanks!!

• Answer:

  When the US increases the money supply, each dollar will be worth less, so prices will increase (this is called inflation). All prices in the US will increase by a constant factor since the dollar will worth less across the board. An increase in money supply does not affect domestic prices in foreign countries (in a simple model), what it will do is change the exchange rate or the price of US goods relative to foreign goods. Since there is more money in the US, the US dollar will be worth less and so it will be more expensive to trade US dollars for foreign currency, so the foreign price relative to the US price will be higher. If the money supply increase was distributed to everyone evenly, it would have no effect at all, since the increase in the prices would adjust perfectly to the fact that everyone now has more money.