Answer to Question #143779 in Macroeconomics for Bakary S Dibba

Question

2. 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. Why might this have been an effective weapon?

Answer 1

Paper weapon was effective as hyperinflation is bad in a country. This is because, it alters tax liability in arbitrary way, makes relative price variable, increases shoeleather and menu cost, unit of account becomes less useful hence increase uncertainty and causing arbitrary distribution of wealth. This later undermines people’s confidence in both economy and economic policy.

When foreign planes drop money, people will receive and government will not receive seigniorage revenue from resulting inflation. This benefit is lost.