Question

During World War II, both Germany and England had plans for a paper weapon: they each printed the other's currency, with the intention of dropping large quantities by airplane, so as to increase the other's money supply.

Select all of the following reasons that might have made this an effective weapon.

It would create additional seigniorage revenue for the country.

Menu and shoeleather costs would rise.

Relative prices would become more variable.

Support for the opposing country would rise.

The banking system would fail.

Hyperinflation could undermine the public's confidence in the economy.

Answer 1

This is a case of unplanned or unannounced increase in money supply. Hence it is likely to bring in severe inflation (hyperinflation). This will result in shoeleather cost and menu cost. Public confidence is also undermined. Banks may not fail. Relative prices will now fluctuate more. However, government may not be able to get seigniorage revenue because the money is not released to finance the debt, instead, it is distributed among the public via airplanes.

Select Menu and shoeleather costs, Relative prices, Hyperinflation.