1. Consider the overlapping generations model with fiat money. a) Carefully setting up the budget constraints, characterize the equilibrium of the money market and show how the rate of return on fiat money depends on the growth rate of the economy and the growth rate of the money supply. b) Contrast this equilibrium to the equilibrium the economy would have if there was no money. Explain why the introduction of money is a Pareto improvement. c) Use this model to show and discuss why inflation distorts consumers' intertemporal consumption choice. Focusing on the stationary monetary equilibrium, explain what rate of money growth maximises the welfare of future generations. Discuss what this implies for the rate of inflation when the

1. Consider the overlapping generations model with fiat money. a) Carefully setting up the budget constraints, characterize the equilibrium of the money market and show how the rate of return on fiat money depends on the growth rate of the economy and the growth rate of the money supply. b) Contrast this equilibrium to the equilibrium the economy would have if there was no money. Explain why the introduction of money is a Pareto improvement. c) Use this model to show and discuss why inflation distorts consumers' intertemporal consumption choice. Focusing on the stationary monetary equilibrium, explain what rate of money growth maximises the welfare of future generations. Discuss what this implies for the rate of inflation when the

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

1. Consider the overlapping generations model with fiat money.
a) Carefully setting up the budget constraints, characterize the equilibrium of the
money market and show how the rate of return on fiat money depends on the
growth rate of the economy and the growth rate of the money supply.
b) Contrast this equilibrium to the equilibrium the economy would have if there
was no money. Explain why the introduction of money is a Pareto
improvement.
c) Use this model to show and discuss why inflation distorts consumers'
intertemporal consumption choice. Focusing on the stationary monetary
equilibrium, explain what rate of money growth maximises the welfare of
future generations. Discuss what this implies for the rate of inflation when the
economy experiences population growth.

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