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.)

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

Answer 1

Monetary equilibrium is a situation where the supply of money equals the demand, given a particular array of prices. The supply of money includes both the monetary base and various forms of credit. In monetary equilibrium, the monetary system is doing the most it can to facilitate beneficial trades. An excess supply of money induces people to make some trades that market participants will later judge not to have been beneficial. A deficient supply of money hinders people from making some beneficial trades. The concept of monetary equilibrium is the fundamental feature of the macroeconomic theory originally formulated by Knut Wicksell (1898, 1906) and corrected, clarified and improved in the 1930s by Erik Lindahl (1930, 1934 and 1939b) and Gunnar Myrdal (1932,1933 and 1939). Wicksell's approach was the first attempt to link the analysis of relative prices with the analysis of money prices.

Population pattern may have implications for monetary policy as a conse­quence of its possible effects on the economic and financial environment within which monetary policy is conducted. It can affect key features and the functioning of the real economy, as well as the structure and development of financial markets. Significant effects are as following :

Thus the potential impact of population pattern on the structure and func­tioning of the economy and on the conduct of monetary policy could be substantial and far-reaching. At the same time, this impact is very gradual, fairly complex and highly uncertain. Pattern of the population could have implications for the monetary policy as a consequence of its possible effects both on the economy’s aggregate supply and demand, and on the channels and dynamics of the monetary transmission mechanism, as also determined by the evolving structure of financial markets and the role of financial intermediaries. The aging process can affect both the long-term equilibrium values of key macroeco­nomic variables and important factors determining the dynamic response of the economy to shocks and policy actions.