# 5. Using money creation to pay for government spendingConsider Snackistan, a hypothetical country that produces only burritos. In 2018, a burrito is priced at \$4.00.Complete the first row of the table with the quantity of burritos that can be bought with \$700.Hint: In this problem, assume it is not possible to buy a fraction of a burrito, and always round down to the nearest whole burrito. For example, ifyour calculations result in 1.5 burritos, the answer should be 1 burrito.Price of a BurritoBurritos Bought with \$700(Quantity)(Dollars)Year20184.002019Suppose the government of Snackistan cannot raise sufficient tax revenue to pay its debts. In order to meet its debt obligations, the governmentprints money. As a result, the money supply rises by 20% by 2019.Assuming monetary neutrality holds, complete the second row of the table with the new price of a burrito and the new quantity of burritos that can bebought with \$700 in 2019.The impact of the government's decision to raise revenue by printing money on the value of money is known as the

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Step 1

When the price of a burrito is \$4 then with a money income of \$700, an individual can purchase 700/4 = 175 burritos in 2018.

It is given that the money supply increases by 20% in 2019.

Since the money neutrality holds, the price of a burrito will also increase by 20% i.e. in 2019, the price of a burrito will become (4) (1.2) = \$4.80.

So, with \$700 of money income, only 700/4.80 = 146 burritos can be purchased.

 Year Price of a Burrito Burritos bought wit...

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