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

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter15: Monetary Theory And Policy

Section: Chapter Questions

Problem 3.7P

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