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The economy, at a basic level, is the circulation of money which enables productivity. For example, a bus driver might use their money to watch a movie, the movie producer might use their revenue (gathered from the bus driver and many others) to purchase editing software, the software maker might use their revenue (from the movie producer and others) to buy food, and the food producer might use that money to take a bus, thus returning the money back to the bus driver. The total amount of money has not changed, it merely circulated in a loop, but everyone in the loop received benefits and produced value in the form of goods or services. | The economy, at a basic level, is the circulation of money which enables productivity. For example, a bus driver might use their money to watch a movie, the movie producer might use their revenue (gathered from the bus driver and many others) to purchase editing software, the software maker might use their revenue (from the movie producer and others) to buy food, and the food producer might use that money to take a bus, thus returning the money back to the bus driver. The total amount of money has not changed, it merely circulated in a loop, but everyone in the loop received benefits and produced value in the form of goods or services. | ||
| β | The real world economy has much larger and more complex networks of buyers and producers compared to the example above, but nevertheless it works on the same principle. Many people correctly associate the economy with money (or stocks in Ponytail's case), but may not understand the full picture. | + | The real world economy has much larger and more complex networks of buyers and producers compared to the toy example above, but nevertheless it works on the same principle. Many people correctly associate the economy with money (or stocks in Ponytail's case), but may not understand the full picture. |
Circulation of money is critical to a healthy economy. In a recession, financial hardship causes people to spend less money, which leads to fewer goods being produced, fewer jobs available, and people earning and spending even less money. That is why (somewhat counter-intuitively) governments need to spend ''more'' money during a recession in order to infuse money back into the economy and get it circulating again. The Federal Reserve lowering interest rates is also a planned, strategic move to increase the money supply, which encourages investment and economic growth. | Circulation of money is critical to a healthy economy. In a recession, financial hardship causes people to spend less money, which leads to fewer goods being produced, fewer jobs available, and people earning and spending even less money. That is why (somewhat counter-intuitively) governments need to spend ''more'' money during a recession in order to infuse money back into the economy and get it circulating again. The Federal Reserve lowering interest rates is also a planned, strategic move to increase the money supply, which encourages investment and economic growth. | ||
