Suppose we have an economy where the population is the same every period, Nt = N...

Suppose we have an economy where the population is the same every period, Nt = N and the money supply is increasing by z each period, i.e., Mt = zMt−1. The government uses the money it creates each period to finance a lump-sum subsidy of a ∗ goods to each old person. (a) (10 points) Find the equation for the budget set of an individual in the monetary equilibrium. Graph it. Show an arbitrary indifference curve tangent to the set and indicate the levels of c1 and c2 that would be chosen by an individual in this equilibrium. (b) (10 points) On the graph you drew in part a, draw the feasible set. Take advantage of the fact that the feasible set line goes through the monetary equilibrium. Label your graph carefully, distinguishing between the budget and feasible sets. (c) (5 points) Briefly explain why the monetary equilibrium does not maximize the utility of the future generations. Support your argument with references to the graph you drew in parts a and b.

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Rahul Sunny answered 1 year ago

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