Gary Rabbior is the president of the Canadian Foundation for Economic Education. This is the second of a six-part series on understanding how the economy works and why it matters to investors.
To explore the relationship between money, monetary conditions, and the economy, let’s use an analogy. Specifically, let’s use a game we’ll invent and call “Auction Block.”
The Auction Block Game
The purpose of the game is for each player to try to accumulate as much wealth as possible. Each player is given $10,000 at the start of the game.
Players roll dice and move around a game board. The game board is made up of a series of pictures of items for sale. When a player lands on an item, a card with a picture of that item is placed on the “Auction Block.” Players then bid for the item, and the item (and the card) go to the highest bidder.
There are also squares on the board titled “News and Information.” The player landing on one of these squares is made aware of some piece of news or information that may ultimately affect the market price of a particular item on the game board. Other players will not have access to that information. As each player accumulates more knowledge, the bidding activity of the players will be affected. At the end of the game, the actual current market price of each item (reflecting news that was shared with players throughout the game) will be revealed. Players will then calculate the dollar value of the wealth they have accumulated and the player with the most wealth is the winner.
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Therefore, it may work out that a player pays more for an item than it is ultimately worth since they may not have received information in the game that affected its value. Or a player may have paid less. Everything will depend on the bidding activity, players’ access to and interpretations of information, and the effects of market events.
For our purpose, we are going to assume that there are five games of Auction Block taking place simultaneously involving five different groups of players in five different rooms. This will enable us to learn about how the amount of money affects the game – and the “Auction Block” economy. In this article, we will examine the games going on in Rooms #1 and #2. We will look at the games in the other three rooms in the next article.
In Room #1, the game is being played in the manner just described.
In Room #2, however, we’ll make one change to our Auction Block game: we’ll double the amount of money that each player receives at the outset of the game from $10,000 to $20,000.
If we were to observe the game in Room #1 and compare it with the game in Room #2, what would we likely see as the impact of doubling the quantity of money? To answer this question we need to ask ourselves the following: Can more items be purchased from the Auction Block with the higher quantity of money available for spending? The answer is no. Why? Because there has been no increase in the number of items available in the game for purchase. We doubled the amount of money, but we did not increase the number of items available for purchase.
