Question

Describe the essential features of a model economy in a monetary market of rational people for which each of the following statements is true: (These features might include the pattern of population growth, monetary growth, endowments, and government policies. Note that there may be more than one moedel that yields the given results.)

a. The gross rate of return on fiat money is 1. The monetary equilibrium also maximizes the utility of the future generations.

b. The price level doubles from period to period. The monetary euilibrium also maximizes the utility of the future generations.

c. The gross rate of return on fiat money is 1. The monetary equilibrium does not maximize the utility of the future generations.

Answer 1

A monetary equillibrium is when the government fixes the price level. When the government sets the growth rate of the money supply equal to the growth rate of the economy, we will get monetary equillibrium at that point. The monetary equillibrium is inefficient because, an allocation like point higher than equillibrium is preferred by all.

To keep the value of money constant and the price level constant, the rate of expansion of the fiat money stock Z must be equal to the rate of growth of money demand, which is the rate of growth of population "n". ie., constant value of money is the base. But, the stock of fiat money expands at the same rate as the demand for the fiat money.

The question that remains is whether is desirable to increase the money rate at the same rate at which money demand is growing. i.e., we must compare monetary equillibrium with z=n to the feasible set when n>1 . When Z is equal to n, the lifetime budget set is a stationery monetary equillibrium which becomes

c1 + c2 <= y + a

It depends on the following features:

Supply and Demand

The concept of supply and demand plays a role in determining your pricing structure. Generally, the larger the available supply of goods or services in relation to their demand, the lower the price you can charge. Conversely, if demand is high but the supply is low, the price charged goes higher. This is an important consideration for small business owners in which supply or demand fluctuates widely, such as the operator of a gas station.

Competition

A market economy encourages competition. Regardless of the type of small business you operate, you likely face competition in some form. The more competition you encounter, the more you have to monitor your pricing in relation to your competitors. You also need to develop some form of marketing campaign to differentiate yourself from your competition and to carve out your own niche in the marketplace.

Profit

Business owners in a market economy are usually motivated by how much money they make. One measuring stick of the success of a business enterprise is the "bottom line," or how much revenue it generates in relation to its expenses. Thus, an overall goal of businesses in a market economy is to attract customers who will buy their products at a price that earns them the highest profits. In turn, consumers seek products that offer the highest quality for the lowest price.

Less Government Intervention

In a market economy, the government does not dictate economic policy as it does in a planned or social economic structure. In theory, the government's role is to help maintain market stability, such as when the Federal Reserve Board raises or lowers interest rates. This means that components such as prices are set by market conditions with minimal government intervention.