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Question 3- Consider an economy with a shrinking stock of fiat money. Let Nt = N,...

Question 3- Consider an economy with a shrinking stock of fiat money. Let Nt = N, a constant, and Mt = z Mt-1 for every period t, where z is positive and less than 1. The government taxes each old person t goods in each period, payable in fiat money. It destroys the money it collects.

d. Find and explain the rate of return in a monetary equilibrium.

e.Prove that the monetary equilibrium does not maximize the utility of the future generations. Hint: follow the steps of the equilibrium with a subsidy, noting that a tax is like a negative subsidy.

f.Do the initial old prefer this policy to the policy that maintains a constant stock of fiat money? Explain.

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Rahul Sunny answered 2 years ago
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