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> Wherever the money came from, if you dump it through the window, you'll be helping a few people, but at the same time causing inflation that will hurt everyon

> Wherever the money came from, if you dump it through the window, you'll be helping a few people, but at the same time causing inflation that will hurt everyone else. On first read I thought that this was incorrect, but on pondering a bit more, I think it's sound -- the observation is that in effect you're creating new Congolese money, and you've not actually produced any value to add into the economy, you've just increased the numerator in the <currency/value> equation. (Taking the example further, if there's 100 CDF in circulation, and you add 100 CDF to the economy, then you'd have to reindex and make everything cost 2x. The only reason this isn't obvious is because it takes time/transactions for this price signal to equilibrate through the economy, and so it's impossible to measure on the scale that the example considers. Perhaps this is more obvious if we reconsider the thought experiment with X=(Congolese GDP).) On the other hand, if you were to hand over some USD from your pocket, those have "inherent value" from a Congolese person's perspective, in that they are fungible with goods on the international market and don't remove value from someone else's currency. Anyone with actual Economics theory know if my intuition here is correct or what model describes it?

notahacker 8y ago
You might not have produced anything, but you have given somebody else that produced something a reward, so now they can start making new things and buy new material right away. Also, they know there's a wealthy foreigner that keeps handing out Congoese Francs, so there's more incentive to do so. Where the additional money is spent it'll tend to drive up prices; where it's invested in additional production it won't. In practice, on a national level it's unlikely any individual is going to drive up the general price level because the actual quantity of currency in circulation is driven by the banking system (which ha policies specifically designed to keep the supply and demand for money in balance). And an tourist handing out currency willy nilly is going to have a big impact on prices in a small village regardless of what currency they pay in, because there's not much choice or competition there. In terms of theory, the basic intuition is described by the Quantity Theory of Money and the reasons why prices/wages tend to rise slower than wages is covered by (New) Keynesian economics; covering when, how and why the extra spend might lead to more growth or more inflation is pretty much the entire first year of undergrad macroeconomics (particularly with the USD added in as well; that introduces the dynamic of how a fall in the value of the Congoese Franc affects imports and exports and resulting effects on local production)
munificent 8y ago
> On first read I thought that this was incorrect, but on pondering a bit more, I think it's sound -- the observation is that in effect you're creating new Congolese money, and you've not actually produced any value to add into the economy, you've just increased the numerator in the <currency/value> equation. This depends entirely on how you distribute the money. If you give each Congolese person an amount of money scaled by how much they currently have then, yes, you're just changing the currency scale uniformly and no one's relative wealth is affected. But if you give everyone a fixed amount of money, then even though the total value of the Congolese economy is the same, you have reduced economic disparity between its members.

notahacker 8y ago

You might not have produced anything, but you have given somebody else that produced something a reward, so now they can start making new things and buy new material right away. Also, they know there's a wealthy foreigner that keeps handing out Congoese Francs, so there's more incentive to do so. Where the additional money is spent it'll tend to drive up prices; where it's invested in additional production it won't. In practice, on a national level it's unlikely any individual is going to drive up the general price level because the actual quantity of currency in circulation is driven by the banking system (which ha policies specifically designed to keep the supply and demand for money in balance). And an tourist handing out currency willy nilly is going to have a big impact on prices in a small village regardless of what currency they pay in, because there's not much choice or competition there. In terms of theory, the basic intuition is described by the Quantity Theory of Money and the reasons why prices/wages tend to rise slower than wages is covered by (New) Keynesian economics; covering when, how and why the extra spend might lead to more growth or more inflation is pretty much the entire first year of undergrad macroeconomics (particularly with the USD added in as well; that introduces the dynamic of how a fall in the value of the Congoese Franc affects imports and exports and resulting effects on local production)

munificent 8y ago

> On first read I thought that this was incorrect, but on pondering a bit more, I think it's sound -- the observation is that in effect you're creating new Congolese money, and you've not actually produced any value to add into the economy, you've just increased the numerator in the <currency/value> equation. This depends entirely on how you distribute the money. If you give each Congolese person an amount of money scaled by how much they currently have then, yes, you're just changing the currency scale uniformly and no one's relative wealth is affected. But if you give everyone a fixed amount of money, then even though the total value of the Congolese economy is the same, you have reduced economic disparity between its members.