Consider the following (hypothetical) cash economy with no banks. The money supply consists entirely of $1000 in currency. Output is currently at potential. The government is currently faced with a $100 budget deficit and chooses not to raise taxes,but instead prints $100 more currency with which to balance its budget. The long run result is likely to be

Question

Quizplus · Accepted Answer

With an increase in the money supply and no corresponding increase in output, there will be an excess of money in the economy leading to an increase in the general level of prices (inflation). The exact increase in inflation will depend on the velocity of money, but in the long run, it is likely to be around 10%. The other options are not likely to be affected in the long run by this one-time increase in the money supply.

Consider the Following (Hypothetical) Cash Economy with No Banks