Game A. Auction Block

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1 Auction Block 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) goes 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. As each player accumulates more knowledge, the bidding activity of the players will be affected. At the end of the game, the current market price of each item is revealed, and players calculate the dollar value of the wealth they have accumulated. It may work out that a player paid more for an item than it is ultimately worth. 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. In Room #1, Game A is being played in the very manner just described. In Room #2, for Game B, 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 to $20,000. What is the impact in Game B of doubling the quantity of money? Can more items be purchased from the Auction Block with the higher quantity of money available for spending? No, because there is no increase in the number of items available for purchase. We doubled the amount of money, but we did not increase the number of items. As a result, players are spending more in Room #2 for Game B, but only because prices are being bid up and are higher. With twice as much money and more spending (but without additional things to buy), prices in Game B will probably double. Game A Game B Chapter Five Money and the Economy 61

2 Are the players in Room #2 really any better off, as a group, than those in Room #1 because we doubled the amount of money in the game? No. The same items are acquired by the players in both Rooms in both games. But the players in Room #2 acquire their items by paying higher prices. The players in Room #2 are no better off in real terms with twice the amount of money. What the additional money in Game B does is raise the average price level as the prices paid for the items increase. This concept of average price level is very important, and we should take time to understand what it means. Statisticians monitor increases and decreases in the prices of a wide range of goods and services to monitor the change in the average price level. There are a great many prices for the many goods and services produced in our economy. And, over time, some prices rise while others decline or stay the same. What we, economists, and policymakers are concerned with are changes in the general level of prices. That is, are prices, on average, rising or falling? If the extent of price increases is greater than the decreases, then the average price in the economy will rise. That is, the average price paid for goods and services will rise. What we mean by inflation is a situation in which the average price level rises in some persistent manner. Think back to our widget economy in Chapter Four and the impact that rising prices had on the average price of a widget. Throughout the rest of this publication, we will refer to changes in the average price level, or simply price level, in the economy. If we state that the price level is higher, we mean that the average price at which goods and services are being exchanged in the economy is higher than in the previous period. If the rise is persistent, inflation is occurring. 62 Chapter Five Money and the Economy

3 In our Auction Block game, doubling the quantity of money in Game B only serves to double the prices being bid over those being bid in Game A. The average price level increases and causes inflation. At the same time, the players are no better off in real terms. It is impossible to acquire more items even with the additional money. There simply isn t anything else to buy, and the additional money only serves to increase prices. Most Canadians would be surprised to hear that it is possible to have twice as much money but be no better off. But you can see how that s possible. Just as it was possible to pay more dollars, yet produce/acquire fewer widgets. Remember, money is used in our society to acquire goods and services. And, unless you can eat the money or use it for some other practical purpose, that is all it is good for. In money, or nominal, terms the players in Game B will have a higher level of monetary wealth. But their real wealth what they actually own or could acquire is exactly the same as that of the players in Game A. Let s use our game to make another point. Suppose in Room #3 and Game C we double the quantity of money again over that used in Game A. But this time, we won t double the players money equally. Suppose there are 3 players. We give one player $20,000, one player $10,000, and one player $30,000. The quantity of money in the game has doubled (from $30,000 to $60,000), but each player has a different amount. As with Game B, as Game C begins, the amount the players are generally willing to bid will likely rise above the prices bid in Game A since two players have considerably more money to spend. With no additional things to buy, this added spending will generate higher prices. But, as prices rise, we can see that each player is affected differently. If prices double in this game, the player with $30,000 will end up better off than if he/she was playing in Game A because income has more than doubled. This player will find it easier to pay the higher prices. The player with $20,000 may find that there is no difference. Prices double over those in Game A, and the player s income is double that of a player in Game A. That player is no better off and no worse off than those playing Game A. The player with $10,000 will, however, be in a very different position. As prices rise in Game C, that player will have a hard time paying the higher prices and, therefore, will end up acquiring less than the other players who are playing in Game C or Game A. In Room #3, Game C helps show how inflation can hurt certain people. If prices rise but a person s income can t keep pace, he or she can end up worse off. That s one good reason to try to keep prices in our economy stable and under control. Let s go one step further with our game. In Game D (being played in Room #4), instead of doubling the amount of money players receive over that Game C Chapter Five Money and the Economy 63

4 Game D in Game A, we will cut the amount of money in half. What impact does this have? Are the players in Room #4, who have less money, less well off, as a group, than those in Room #1 playing Game A? With all the players in Game D having less money, the likelihood is that players will bid lower prices for the items on the Auction Block. Items will be purchased at lower prices than those in Game A. Each player in Game D may be as well off as those in Game A or Game B. Lower prices and a lower average price level make this possible. Now, if we compare total spending in Game A with that in Game D, we will see that the total level of spending in Game D is lower. Applying what you learned in Chapter Four, you are now able to say that nominal spending was lower in Game D. This doesn t mean that people are worse off in Game D. Because of deflation (a decline in the average price level), the players are simply spending less money to acquire the same items at lower prices. This doesn t mean that deflation is necessarily a good thing. An economy will usually experience significant hardship as prices are reduced. But prices will respond as changes occur to the quantity of money and level of spending. The point should be clear now. More money and more spending in an economy don t necessarily mean more goods and services are purchased and people are better off. The level of spending has to be considered along with available output and the changes in prices. As we ve learned, it is important that we use real, rather than nominal, information when comparing one year in our economy with another year. Now, let s move on to Room #5 and Game E. Suppose we add some new items to our game board so that they are playing with a different game board than the players in Room #1 playing Game A. And we ll add some new money to the game, over and above the amount given to those in Room #1. (For the moment, we won t state just how much new money.) What is the impact of the new items and the new money? The additional items represent increased output. At least some of the additional money added to Game E can be used to buy these new items that have been added to the game board in Room #5. The players can now become better off in real terms because there are new things to acquire. Whether or not prices rise will depend on how the increase in money and spending compares with the increase in real things to buy. If you can follow the above relationship, you are beginning to get a real grasp on the relationship between money, output, and prices in the economy. In Games B and C, more money is added, but there is nothing new to buy. The new money only serves to push up prices. In Game E, there are new items for the extra money to acquire. More money can be used for more spending without necessarily raising prices. 64 Chapter Five Money and the Economy

5 Reprinted with permission of the Canadian Foundation for Economic Education.