2. Ricardian Equivalence VS Government with Money This exercise will show you the difference between a government that can attempt to stimulate the economy by financing through taxes and borrowing and a government that can print money. a) where government could print the money Consider the following government budget constraint between two periods P₁G₁ + M₁ + (1 + i)B₁ = = P₁71 + B₂+ M₂. What are the ways the goverenment could finance its deficit in this economy? b) Suppose the government plans to print money at a rate of μ: M₂ = (1 + μ) M₁. Re-write the government deficit as a function of money demand where in equilibrium mª(Y, i) = Ms. Since the government doesn't plan to borrow, you could drop B+ from the budget constraint. c) Suppose that people make N trips to the bank each year. Each trip cost them F for transportation cost. And the nominal interest rate is i. The average money balance is M = PY 2N Explain why people want to hold money in this economy. Derive the demand for money when people want to minimize the cost of holding money by choosing the number of trips they make to the bank each year. min PFN + iM min Is the demand for money increasing or decreasing in the following variables: income, nominal interest rate?
2. Ricardian Equivalence VS Government with Money This exercise will show you the difference between a government that can attempt to stimulate the economy by financing through taxes and borrowing and a government that can print money. a) where government could print the money Consider the following government budget constraint between two periods P₁G₁ + M₁ + (1 + i)B₁ = = P₁71 + B₂+ M₂. What are the ways the goverenment could finance its deficit in this economy? b) Suppose the government plans to print money at a rate of μ: M₂ = (1 + μ) M₁. Re-write the government deficit as a function of money demand where in equilibrium mª(Y, i) = Ms. Since the government doesn't plan to borrow, you could drop B+ from the budget constraint. c) Suppose that people make N trips to the bank each year. Each trip cost them F for transportation cost. And the nominal interest rate is i. The average money balance is M = PY 2N Explain why people want to hold money in this economy. Derive the demand for money when people want to minimize the cost of holding money by choosing the number of trips they make to the bank each year. min PFN + iM min Is the demand for money increasing or decreasing in the following variables: income, nominal interest rate?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
Transcribed Image Text:2. Ricardian Equivalence VS Government with Money
This exercise will show you the difference between a government that can attempt to stimulate the
economy by financing through taxes and borrowing and a government that can print money.
Consider the following government budget constraint between two periods
where government could print the money
P₁G₁ + M₁ + (1 + i)B₁ = P₁7₁ + B₂ + M₂.
What are the ways the goverenment could finance its deficit in this economy?
b)
Suppose the government plans to print money at a rate of μ:
M₂ = (1 + μ) M₁.
Re-write the government deficit as a function of money demand where in equilibrium mª(Y, i) =
Since the government doesn't plan to borrow, you could drop Bt from the budget constraint.
MS
P
Suppose that people make N trips to the bank each year. Each trip cost
them F for transportation cost. And the nominal interest rate is i. The average money balance is
PY
2N
M =
Explain why people want to hold money in this economy. Derive the demand for money when
people want to minimize the cost of holding money by choosing the number of trips they make to
the bank each year.
min PFN + iM
N
Is the demand for money increasing or decreasing in the following variables: income, nominal
interest rate?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 5 steps with 7 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education