You live in an economy experiencing high inflation. In this economy the price level P (t) has doubled after one year, that is, the price level is 2 x P (t) at the end of year t. Your endowment of cash at the beginning of year t is $50,000. a) How much money you have to add to your money balances in order to maintain the initial purchasing power of your cash endowment? Explain briefly. Correct answer without explanation does not gain marks. b) If you bought one bitcoin at a total cost of $50,000 at the beginning of year t and sold it by $87,500 at the end of year t, what was the real rate of return on your investment? c) how much were you taxed by the inflation tax, assuming that you kept the $50,000 under your mattress during the whole year t?

You live in an economy experiencing high inflation. In this economy the price level P (t) has doubled after one year, that is, the price level is 2 x P (t) at the end of year t. Your endowment of cash at the beginning of year t is $50,000. a) How much money you have to add to your money balances in order to maintain the initial purchasing power of your cash endowment? Explain briefly. Correct answer without explanation does not gain marks. b) If you bought one bitcoin at a total cost of $50,000 at the beginning of year t and sold it by $87,500 at the end of year t, what was the real rate of return on your investment? c) how much were you taxed by the inflation tax, assuming that you kept the $50,000 under your mattress during the whole year t?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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