Using money creation to pay for government spendingConsider Arcadia, a hypothetical country that produces only crab cakes. In 2020, a crab cake is priced at $5.00. Complete the first row of the table with the quantity of crab cakes that can be bought with $700.Hint: In this problem, assume it is not possible to buy a fraction of a crab cake, and always round down to the nearest whole crab cake. For example, if your calculations result in 1.5 crab cakes, the answer should be 1 crab cake. YearPieces of Crab CakeCrab Cakes Bought with $700 (Dollars)Quantity20205.00 2021 Suppose the government of Arcadia cannot raise sufficient tax revenue to pay its debts. In order to meet its debt obligations, the government prints money. As a result, the money supply rises by 50% by 2021. Assuming monetary neutrality holds, complete the second row of the table with the new price of a crab cake and the new quantity of crab cakes that can be bought with $700 in 2021. The impact of the government's decision to raise revenue by printing money on the value of money is known as the INFLATION TAX, VELOCITY OF MONEY, FISHER EFFECT or CLASSICAL DICHOTOMY.

Answered: Consider Arcadia, a hypothetical…

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter1: The Art And Science Of Economic Analysis

Section: Chapter Questions

Problem 4.7P

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Using money creation to pay for government spending

Consider Arcadia, a hypothetical country that produces only crab cakes. In 2020, a crab cake is priced at $5.00.

Complete the first row of the table with the quantity of crab cakes that can be bought with $700.

Hint: In this problem, assume it is not possible to buy a fraction of a crab cake, and always round down to the nearest whole crab cake. For example, if your calculations result in 1.5 crab cakes, the answer should be 1 crab cake.

Year	Pieces of Crab Cake	Crab Cakes Bought with $700
	(Dollars)	Quantity
2020	5.00
2021

Suppose the government of Arcadia cannot raise sufficient tax revenue to pay its debts. In order to meet its debt obligations, the government prints money. As a result, the money supply rises by 50% by 2021.

Assuming monetary neutrality holds, complete the second row of the table with the new price of a crab cake and the new quantity of crab cakes that can be bought with $700 in 2021.

The impact of the government's decision to raise revenue by printing money on the value of money is known as the INFLATION TAX, VELOCITY OF MONEY, FISHER EFFECT or CLASSICAL DICHOTOMY.

Expert Solution

Step 1

If you have too much money at a time of high inflation, you will pay inflation tax. Despite the fact that the government does not impose a direct fee. Cash-carrying people eventually lose some of their cash as the value of money decreases due to inflation.

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