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There seems to be a paradox between goods and money. Consider
the following four scenarios.
Scenario #1) The food and clothing you have suddenly doubled?
Scenario #2) The food and clothing EVERYONE has suddenly doubled?
Scenario #3) The money you have doubles suddenly?
Scenario #4) The money EVERYONE has suddenly doubled (assume there is no
change in national output)?
For each of the following scenarios, briefly identify if you would be better off or
not. Next, explain the difference in your answers to scenarios #2 and #4. Why are
you better off in one and not the other?

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azikennamdi

The responses to the paradox scenarios given above are:

  • Scenario #1: I'd be better off.
  • Scenario #2: I'd still be better off
  • Scenario #3: I'd be better off
  • Scenario #4: I will NOT  be better off.

What is the explanation for why one is better off in 2 than in 4?

Scenario 4 represents a general increase in money available to everyone.

Now this seems like a good thing but if there is no corresponding increase in National Output, the only thing that can result from such a scenario is:

  • Inflation; and
  • Loss in the value of money.

This is because everyone suddenly can buy more, but the products and services produced remained the same. Hence there will be serious inflation.

At the end of the day, everyone is back to square one. In scenario 2 however, the increase in spending power is in relation to others.

While the spending power of others remained the same, mine increased hence the advantage.

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