High money growth without matching output growth drives prices up.
Above ~50%/month = hyperinflation. Central bank rate hikes
suppress velocity.
About the Inflation Simulator
This simulation models how the general price level responds to monetary conditions through the Quantity Theory of Money, expressed by the Fisher equation of exchange, M·V = P·Q. Each frame advances the economy in fractions of a year: the money supply M and real output Q grow at their set rates while velocity V drifts, and the target price level is computed as P = MV/Q. The headline inflation reading is approximated as ΔM% + ΔV% − ΔQ%.
The control panel lets you set annual money-supply growth, velocity and its drift, real GDP growth, and the central bank interest rate, which damps velocity above a 2% threshold. Preset scenarios span Stable, Moderate, High and Hyper regimes. Watching prices race ahead of output illustrates why excessive money creation erodes purchasing power, the central concern of every central bank targeting price stability.
Frequently Asked Questions
What does this simulator actually show?
It visualises how the price level changes when money supply, velocity and real output move. A storefront price tag, a money-versus-price chart, an inflation gauge, a Phillips curve and a live MV=PQ panel all update together so you can see the link between printing money and rising prices.
What is the equation behind it?
It uses the Fisher equation of exchange, M·V = P·Q, where M is money supply, V is velocity, P is the price level and Q is real output. Rearranged, the price level is P = MV/Q, and the simulator nudges P towards that target each step with a small lag.
How is the inflation rate calculated?
Inflation is approximated as the growth in money supply plus the drift in velocity minus the growth in real output: roughly ΔM% + ΔV% − ΔQ%. This is the logarithmic-differentiation form of MV=PQ, so faster money growth raises inflation while rising output absorbs it.
What do the controls do?
Money Supply Growth sets annual ΔM from 0 to 200%. Velocity sets V in turns per year, with a separate drift slider. GDP growth sets ΔQ. The interest rate slider raises the central bank rate, which suppresses velocity once it exceeds 2%, mimicking tighter monetary policy.
What is velocity of money?
Velocity is how many times each unit of currency is spent on goods and services in a year. Higher velocity means money circulates faster, which for a given money stock pushes the price level up. In the model V starts near 1.8 and drifts according to your drift setting and the interest rate.
What counts as hyperinflation here?
The gauge marks zones up to a violet band above 50% per year, labelled Hyper. The classic economic definition of hyperinflation is inflation exceeding roughly 50% per month, an extreme regime where prices can double in days, as seen in 1920s Germany or 2000s Zimbabwe.
How does the interest rate affect things?
Raising the central bank rate applies a suppression factor proportional to the amount the rate exceeds 2%, which slows or reverses velocity drift. Less circulation eases price pressure, which is why central banks lift rates to cool an overheating economy and bring inflation back to target.
What is the Phillips curve panel?
It plots the historical trade-off between inflation and unemployment: lower unemployment tends to coincide with higher inflation. The simulator draws a simple inverse curve and marks your current position. In reality this relationship is unstable and breaks down under stagflation or shifting expectations.
Is this simulation physically accurate?
It captures the core logic of monetary economics but is a simplified teaching model. It assumes velocity and output respond mechanically, ignores expectations, supply shocks, fiscal policy and the lags and feedback loops of real economies, so it should be read qualitatively rather than as a forecast.
Why does printing money not always cause inflation?
If money growth is matched by rising real output, or by falling velocity as people hoard cash, the price level can stay stable. Inflation only emerges when nominal spending, M times V, grows faster than the economy can produce goods, leaving more money chasing the same output.
Where is this used in the real world?
The framework underpins how central banks such as the Bank of England think about price stability, why governments avoid monetising deficits, and how economists diagnose hyperinflations. Setting the Hyper preset reproduces a runaway spiral similar to historical currency collapses.