Question

In the monetary intertemporal model, suppose the central bank issues money in exchange for capital, and rents this capital out to firms each period, thus earning the market real interest rate r on the capital. Over time, as the central bank earns interest on its capital holdings, it uses these returns to retire money from the private economy. What are the long-run effects? Is the outcome economically efficient? Explain your results.

Answer 1

Answer : Macroeconomics has been very livid in explaining how the Governments function in coordination with the public and the private industries operating in the country and thereby helps afloat the country’s overall economic condition. The monetary intertemporal model is also a macroeconomic set up model where the country’s functioning with the Private firms and their operative policies are exclusively portrayed. In the case mentioned, if the the central bank issues money in exchange for capital, and rents this capital out to firms each period, thus earning the market real interest rate r on the capital, and over time, as the central bank earns interest on its capital holdings, it uses these returns to retire money from the private economy , this would mean that the Central Bank is buying off or getting in as exchange the capital assets of the various firms in exchange for money being paid to them. Now, the Central Bank is then renting or giving out these Capital assets to the Private firms against money being received from the private firms. This will mean that the Central Government is progressively pulling out the money from the private sector firms and bringing all the major control of the Country’s economy in its own hands. The Long-term impact of this will be that the Private companies will slowly start losing their grip from the market, and finally hand over the management to the Public firms or the Government. This would further mean that country is slowly moving to an economic condition where the State exercises maximum powers over the economy and the private firms are mere players who play at the hands of the Government. This situation is not economically a very efficient condition because if the private firms loose their grip from the economy, competition from the market will disappear bringing back a no-competitive market where the forces of demand and supply and the other factors of production will hardly play a vital role in finalizing the economic condition, rather it will be the Public Central Bank determining all major economic changes and decisions, thereby the benefit of the consumers depending totally on the wishes or policies of the Central Bank.