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This is a hypothetical scenario that I have been thinking about for a while. I have been reading about it, but I can not come up with a definitive answer.

If USA decides to donate 10b USD yearly for 5 years in a row to a country whose nominal GDP for the first year is 15 billion USD and the government of this small country with 2m inhabitants takes the money and converts it to the local currency and with this money doubles the salaries of the employees that work in the public sector and the rest invests it in the country in infrastructure. (We assume there is very little corruption in this country). Will all this influx of capital increase inflation in the country? If yes, by how much?

I do not think there should be inflation or hyperinflation in the country, since in my view, this is the same as foreign investors investing in the country and that just increases the standard of living. On the other hand, we are also talking about a huge amount of money in a small country and doubling the salaries puts a lot of money in the hands of everyone (it is like printing money, right?) will increase prices in the country very quickly?

Thank you

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  • $\begingroup$ Note there is no "convert to local currency". Rather, someone has to buy USD so that you can sell it. $\endgroup$
    – user253751
    Jul 9 at 18:44

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