If you increase the supply of money, there are more dollars chasing the finite goods in the world. The price someone is willing to pay increases, therefore prices rise (inflation). Some foolish dictators have tried printing money to buy their way out of trouble; I think it is Zimbabwe that has (or had) billion dollar bank notes as a result of the hyperinflation their foolish monetary policy created.
If you then try and flood the foreign exchange market with more dollars (i.e. an increase in supply), the value of the Australian dollar in an equilibrium situation decreases. Consider then the implications on demand for the AUD; foreign currency speculators, overseas investors and so on would have great cause for concern over mass printing of money (will the economy be stable in the mid-long run? Will investments be secure? Will we get our money back?), will exit the market, thus causing a contraction in demand. So not only has an increase in currency supply diminished the value of the AUD, but as foreign demand for the dollar diminishes, the equilibrium price for the AUD further reduces, and the quantity of AUD traded reduces.
There are a couple of results from this:
- Australians purchasing imports: As Australia is a net importer (as demonstrated by Australia traditionally having a Current Account Deficit), our purchasing power of imports diminishes. Therefore, printing money to finance the Maglev, for example, could result in costs being higher than anticipated. Printing more money to make up for the decreases value of the AUD would make the issue worse. The same goes for the many other goods we import to function in day-to-day life - these would become far more expensive for the consumer. This creates its own problems.
- Australian exporters: If the value of the AUD is low relative to other economies, our exports become more competitive. Notice in the last 10-15yrs, the rising value of the AUD coincided with some of our export industries (i.e. car manufacturing) closing down?
Australia's currency is well-known to be a 'commodity currency.' When the value of our principal exports increases, so too does the demand for AUD. This was particularly true during the mining boom, where there was a time lag between the onset of tremendous demand for iron ore (and other commodities) and when it could actually be supplied. Once the supply was made available as mines entered their production phases, prices rapidly dropped, and so too did the AUD.
At present, there is concern that renewed demand for commodities could push the AUD too high again. The trouble is, there is a fine line we have to walk here. A highly valued AUD is great for us as net importers of goods (at present this is not the case), but detrimental if there are blossoming industries that could be quite valuable as exports.