Inequality and effect on pricing

External question — Economics Stack Exchange Author: jbuddy_13 Original post: https://economics.stackexchange.com/questions/56321 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. Suppose there’s an island that for whatever reason has a finite amount of US Dollars; 1000 residents live on the island and use this fixed amount of currency to exchange goods and services. Suddenly, a millionaire with a briefcase containing his fortune survives a shipwreck and arrives on the island, so there are now 1001 residents. It’s my understanding that economic theory predicts that the price of goods and services will rise in response to this economic stimulus. I’m curious, however, by what mechanisms does this actually happen? If bartering is assumed then producers can get a measurement of what the millionaire is willing to pay, infer demand curves, and optimize pricing. And in consequence, prices go up on the island. But suppose that bartering is not the custom on this island. If unaware of the millionaire’s wealth of his willingness to pay, how will prices naturally accommodate the new resident? My best guess: pricing experiments. Residents randomly adjust prices, re-evaluate demand curves and optimize from time to time. But other than this mechanism, I can’t envision a means by which prices on island naturally chase this new money if residents are not explicitly made aware of it.

External answer — Economics Stack Exchange Author: 1muflon1 Original post: https://economics.stackexchange.com/a/56323 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. The prices will only start adjusting once the new millionaire starts spending some money. If he is washed ashore without his credit card or cash then even if he has millions somewhere else it will have absolutely no impact on economy. Money that are not circulating in the economy do not affect prices.