If x amount of money were introduced (discretly, with no one noticing) to the market, how does the market “know” that that amount of money has been introduced (thus adjusting prices)?

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If x amount of money were introduced (discretly, with no one noticing) to the market, how does the market “know” that that amount of money has been introduced (thus adjusting prices)?

In: Economics

7 Answers

Anonymous 0 Comments

There are any number of different ways for the banking system to take note of additional currency that wasn’t predicted ahead of time.

Their systems have long since analyzed most regions have nailed down the approximate amount that should be coming in on a regular basis.

How? By studying past records of currency incoming and outgoing.

This non-predicted spikes of incoming currency would draw a red flag for further study. Not from one day’s record of unexpected incoming currency, but over a few weeks, if it kept happening, it’d red-flag for a personal audit of the region.

They’d go in and find out where the extra currency was coming from. This is how they first get hints of counterfeiters.

They’d search for people putting new currency into the system in unexpected ways. People with more income than they should, according to their banking records. Most times, it’s simple things: a personal gift, inheritance or a lucky streak in Vegas. Other times, though, it’s people showing to make 20k a year and yet they’re wallowing in income. So they get flagged for personal examination of the currency that they put into the system, to make sure it’s real, and then begin to try and track down where it’s coming from. Likely drugs or some other illicit business.

Anonymous 0 Comments

It only “knows” when the money is spent.

Imagine a really simple economy – Alice, Bob and Chuck. Alice bakes two loaves of bread every day, and Bob and Chuck both earn $1 per day, which they each use to buy a loaf of bread.

Now, one day (as if by magic) Bob and Chuck both get $2 per day instead of one. Bob gets to Alice first, and buys both loaves of bread for $1 a piece, spending his full $2. Now Chuck is upset because he has money, but no bread. Supply and demand are out of sync – at the price of $1 per loaf, there is more demand than there is supply.

Alice has two choices:

– Bake 4 loaves instead of 2, and keep charging $1 to extract all $4 from the economy

– Charge $2 per loaf instead of $1, extracting all $4 from the economy

Alice, being a smart baker, decides just to raise prices.

Anonymous 0 Comments

Sellers know the rate at which goods will arrive for sale from their factories. When things start selling faster than that, they raise prices to avoid running out (which would force consumers to buy from competitors). They don’t care if the cause is more money or more market share, their price raising response is the same. If prices remain high, they may utilize some of their excess profits to expand their supply, perhaps by building another factory or hiring more workers.

Anonymous 0 Comments

More money in the hands of buyers = more commodities purchased at current price X with some overpriced commodities sold when the cheaper supply runs out, thus rising the average price of sold item.

On top of this direct consequence, the suppliers who sold more products or pricier products can increase the production in response to increased market need, repeating this price increase effect in whatever the supplies they manufactured their products of, driving the costs up for everybody and forcing all the manufacturers to rise prices beyond X, thus making the money in hand of buyers mentioned in first line worth less because the base price of object is now higher.

Anonymous 0 Comments

“the market” is not an independent thinking thing. It’s not sentient.

What would happen is that this new money would enter the market through some means, likely by banks being more willing to lend money.

Banks lending more money means people buy more homes, borrow more on their credit cards, businesses expand by building new plants and such. This all results in people buying more things.

People buying more things means that demand has increased for goods. Since supply of goods is not effected it means that prices need to rise in order for supply and demand to be in balance.

Anonymous 0 Comments

Econ degree here.

This is a macro based question, and also this is a simplification but whatever. Basically, it’s like pouring honey into a bathtub of honey. It’ll all even out eventually, but it takes a little time. The initial infusion of cash will go to the hands of a limited number of people, which will then display an increased willingness to pay for goods, specifically more “elastic” goods. As that willingness to pay is demonstrated, prices will adjust to equalize with supply, leading to a higher price per transaction to maintain steady state until the long game where supply will actually fluctuate to accommodate the new status quo.

Anonymous 0 Comments

Supply and demand does not just work with goods, it also applies to currency itself.
When more currency is added, there is less demand for it, making the currency worth less.