Denmark's 2006 public finances has a surplus of 6% of GDP

[Dinner]

If incomes are rising, which is typical and a quickly growing economy as there is a shortage of skilled labor thus labors can demand higher wages, then you don't have to reduce spending.

[VetLegion]

Originally posted by LordShiva




An overheating economy means it's growing faster than it's natural rate.

Growing output would cause deflation in this model

The very reason demand is a problem is that output can't be increased to match it. We want to see what happens when demand is further increased in this situation, while money supply is fixed.

Now if you go and fix everything in the equation as constant, then obviously there will be no inflation.

Bingo.

But you're arguing that "when there is no increase in money supply, there is no inflation." And that's false.

It isn't.

[LordShiva]

But this is all besides the point. Please understand the transaction equation. Now, differentiate it. You get:

(percent change in the money supply) + (percent change in velocity) = (percent change in the price level) + (percent change in output)

Set percent change in money supply to 0. Notice how this, in no way, requires change in price level to be zero.

[Kontiki]

Edit: Long winded explanation already covered by others.

[VetLegion]

Oerdin, central bank has a duty to increase the money supply to match productivity gains. If it does exactly so, nothing changes. If it increases it more, there is slight inflation, which is what you have in most countries today. Money supply is not really fixed, I'm simplifying for this discussion.

[Kuciwalker]

In addition, it's quite possible to increase the money supply without printing more money.

Originally posted by Kuciwalker

And all prices can't increase without government printing money. Money is a good like any other.

See the "reserve requirement."

[VetLegion]

But this is all besides the point. Please understand the transaction equation. Now, differentiate it.

LordShiva, stop bull****ing, OK?

What does differentiated equation show that undifferentiated doesn't? Are you trying to impress the girls around here or something?

If you actually knew that money velocity changes in this situation, and thus can't be ignored (as I have) you would have said it in simple English (and proven it with links). But you don't, so leave the equation alone. It only proves my point. Or, you could try integrating it and see if it that offers any extra clues...

[LordShiva]

I mean, I did have to explain the savings rate you you

[VetLegion]

Have to go to sleep. As I have said, I have no idea why economy overheating is a problem (a question Eli raised), but I do believe that it is a problem. So if anyone can come up with a link to the the exact mechanism of how it works I would be grateful. Wikipedia article is too short to be satisfactory, but I'm not saying it's untrue or anything.

[LordShiva]

Well, I don't have a link, but it may be helpful to think of it this way: An overheating economy causes unemployment to drop below the natural rate, so the labour market tightens. Firms need to pay higher wages to retain/compete for labour, for which they need more money, for which they'll need to charge higher prices for their goods. If you insist on keeping prices constant, then they'd need to divert money away from investing activities, eroding their future capital base, which is also bad.

[axi]

So this means more money to the workers and less to the capitalists.

That's why they don't want the economy to overheat.

[Saras]

Originally posted by axi
So this means more inflation-eroded money to the workers and less inflation-eroded money to the capitalists.

Fixed!

[Kontiki]

Originally posted by axi
So this means more money to the workers and less to the capitalists.

That's why they don't want the economy to overheat.

Until the bubble bursts and the workers get well and truly screwed.

Communism FTW!

[DanS]

Denmark should lower its taxes by a good amount. I don't know what Denmark's public debt is, but it can't be much, given that the country has been running surpluses for a while.

[axi]

I feel that amassing capital (in an underheated economy) is even more prone to bubbles, because then value is dumped into assets with more subjective pricing, such as stock, luxuries and real estate.