3. Consider the overlapping generations model with fiat money and illiquid capital, in which individuals live for three periods and it takes two periods for investment into capital to produce X > 1 consumption goods. Assume the stock of fiat money and the population are constant. a) Explain why capital and fiat money are not perfect substitutes and discuss what this implies for the rate of return on capital relative to the rate of return on fiat money. b) Suppose only one individual can issue enforceable claims on their capital stock (IOUS). Show that for this individual there is a profitable arbitrage opportunity through borrowing at the rate of fiat money and investing into capital

3. Consider the overlapping generations model with fiat money and illiquid capital, in which individuals live for three periods and it takes two periods for investment into capital to produce X > 1 consumption goods. Assume the stock of fiat money and the population are constant. a) Explain why capital and fiat money are not perfect substitutes and discuss what this implies for the rate of return on capital relative to the rate of return on fiat money. b) Suppose only one individual can issue enforceable claims on their capital stock (IOUS). Show that for this individual there is a profitable arbitrage opportunity through borrowing at the rate of fiat money and investing into capital

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter17: Capital And Time

Section: Chapter Questions

Problem 17.2P

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