Final answer:
Mailing every individual a $100 bill would initially increase the money supply, potentially leading to inflation and a short-term boost to GDP and employment. However, without corresponding increases in goods and services, the primary effect would be rising prices, eroding any gains in real income over the long term.
Step-by-step explanation:
If the Federal Reserve banks mailed everyone a brand-new $100 bill, the immediate effect would be an increase in the money supply. Assuming this increase is not backed by an equal rise in goods and services in the economy, the likely outcome would be inflation. As the money supply increases, and assuming the velocity of money is unchanged or increases as well, demand for goods and services could rise, leading to higher prices.
In the short term, this might increase output if there were unused productive capacity in the economy, as producers ramp up production to meet increased demand. This could result in a temporary boost in Gross Domestic Product (GDP) and potentially lower unemployment, as businesses hire more workers to increase production. Over the longer term, however, if the money supply continues to grow at a rate that exceeds the economy's ability to produce goods and services, the primary effect would be increasing prices rather than output, and any gain in real income would be eroded by inflation.
If we consider the lessons from the hypothetical scenario of the Land of Funny Money, where an unexpected 20% increase in all money-denominated figures occurs overnight, we learn that if such an increase happens universally and simultaneously, the real purchasing power of consumers would remain the same, hence there would be no real economic impact. However, in the real world, such changes are seldom perfectly uniform, and inflation can have redistributive effects, favoring debtors over creditors, and can also create uncertainty and inefficiencies in the allocation of resources.