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UK government promises to pay 80% of wages for people unemployed due to coronavirus. I am not economist, so I am probably missing something, but shouldn’t paying wages to unemployed due to coronavirus result in inflation due to decreased products and services created by economy? Is that just a mechanism to redistribute wealth?

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  • $\begingroup$ We better hope it causes inflation, because the alternative is deflation which is much worse $\endgroup$ – Keith Knauber Mar 28 at 16:45
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Not by itself. The inflation generally depends on the following monetary relation:

$$ MV =PY$$

Where M is money supply, V velocity of money (how much one buck is used in economy), P is the price level (change in which is inflation), and Y is a real output.

Now solving for P so we can focus on inflation gives us:

$$P=\frac{MV}{Y}$$

Hence price level (and consequently) increases when money supply increases, velocity of money increases or output decreases.

Now let’s analyze giving money to those unemployed.

  1. Is it newly created money? If not then money supply won’t increase. If yes then it would increase inflation rate.

  2. Redistribution generally does not affect velocity of money much so we can skip that.

  3. Does this change the output Y? Well not by much those people are already unemployed. If anything it could increase Y as unemployed have probably high marginal propensity to consume so in short run redistribution from a richer person with lower marginal propensity to consume will increase Y. Especially if this spending was not paid out of higher taxes but from debt.

So a priori as long as it’s not financed through printing new money it should not really have effect on inflation. Inflation is ultimately a monetary phenomenon.

Also, yes it’s a redistribution mechanism like most of the things that UK government does. Any policy that uses government funds as a transfer to others, or fund non-public good services (like NHS for example) is a redistributive measure.

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  • $\begingroup$ Well, but if unemployed people do not produce anymore $Y$ is likely to decrease, and… we may need a kind of general equilibrium model with a labour and a commodity market in order to conclude (and some data as well). $\endgroup$ – Bertrand Mar 28 at 17:26
  • $\begingroup$ @Bertrand yes but Y is down not due to government unemployment spending but due to corona virus. Low Y due to corona might as well lead to inflation but your question was about government unemployment spending due to corona not about economic impacts of corona which is completely (from economic perspective) unrelated question to asking about effect of pandemic on inflation. $\endgroup$ – 1muflon1 Mar 28 at 17:31

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