Question

As president of​ Econivalia, you are constantly strained for funds to pay your troops. Your chief economist suggests the following​ plan: ​"When you collect your tax payments from your​ residents, insist on being paid in gold coins. Take those gold​ coins, melt them​ down, and remint them with an extra 15 percent of copper thrown in. You will then have 15 percent more money than you started​ with."
Which of the following is a potential problem with the​ plan?
a. This will increase the money supply and cause inflation to increase over time.
b. Even if troops are unaware of the scheme, the plan will work only temporarily until the increase in money creates inflation.
c. If troops are aware of the plan, they will demand 15% more coins for their wages, which will increase inflation immediately.
d. All of the above are problems with the plan.

Answer 1

Answer: All of the above are problem with the plan.

Explanation:

If a Government rapidly increases the money supplied into an economy, it leads to inflation.

This is because as the citizens of a country get more money at a very short interval, they would tend to demand for more items in the market, the increase in demand would directly lead to an increase in price which is an inflation.

Therefore minting extra money may pay the soldiers but negatively affect the economy as price of commodities would increase.