Let Nt = nNt−1 and Mt = zMt−1 for every period t, where z and n...

Let Nt = nNt−1 and Mt = zMt−1 for every period t, where z and n are both greater than 1. The money created each period is used to finance a lump-sum subsidy of a∗ goods to each young person.

(a) Find the equation for the budget set of an individual in the monetary equilibrium. Graph it. Draw an indifference curve that is tangent to the budget constraint and indicates the levels of c1 and c2 that would be chosen by an individual in this equilibrium.

(b) On the same graph, draw the feasible set. Take advantage of the fact that the feasible set line goes through the monetary equilibrium (c ∗ 1 , c∗ 2 ). Label your graph carefully, distinguishing between the budget and feasible sets.

(c) Briefly explain why the monetary equilibrium does not maximize the utility of the future generations by reference to the graph you produced.

Expert Solution

Rahul Sunny answered 1 year ago

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