Consider Tralfamadore, a hypothetical country that produces only cakes. In 2017, a cake is priced at $4.00. Complete the first row of the table with the quantity of cakes that can be bought with $900.Hint: In this problem, assume it is not possible to buy a fraction of a cake, and always round down to the nearest whole cake. For example, if your calculations result in 1.5 cakes, the answer should be 1 cake. YearPrice of a CakeCakes Bought with $900(Dollars)(Quantity)20174.00  2018   Suppose the government of Tralfamadore 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 20% by 2018.Assuming monetary neutrality holds, complete the second row of the table with the new price of a cake and the new quantity of cakes that can be bought with $900 in 2018.The impact of the government's decision to raise revenue by printing money on the value of money is known as the    .

Question
Asked Nov 26, 2019
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Consider Tralfamadore, a hypothetical country that produces only cakes. In 2017, a cake is priced at $4.00.
 
Complete the first row of the table with the quantity of cakes that can be bought with $900.
Hint: In this problem, assume it is not possible to buy a fraction of a cake, and always round down to the nearest whole cake. For example, if your calculations result in 1.5 cakes, the answer should be 1 cake.
 
Year
Price of a Cake
Cakes Bought with $900
(Dollars)
(Quantity)
2017 4.00  
 
2018
 
 
 
Suppose the government of Tralfamadore 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 20% by 2018.
Assuming monetary neutrality holds, complete the second row of the table with the new price of a cake and the new quantity of cakes that can be bought with $900 in 2018.
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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Expert Answer

Step 1

The price of the cake is given to be $4 in the year 2017. This means that when the economy has $900 and only cakes produced which are sold at $4 for each, the quantity demanded of cakes can be calculated by dividing the total money income with the unit price of cake as follows:

Quantity of cake demanded = Money income of economy
Unit price of cake
900
4
= 225
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Quantity of cake demanded = Money income of economy Unit price of cake 900 4 = 225

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Step 2

Thus, the quantity demanded of cakes will be 225 units at the price of $4.


When the economy goes through the debts and the government prints the money to meet the debt situation, it is said that there will be a 20 percent increase in the money supply in the year 2018. To the increase in the money supply, there will be an equal increase in the price level. Thus, the price of cake will also increase by 20 percent. Thus, the new price of cake can be calculated as follows:

New Price of cake = Old price of cake +(Old price x 0.20)
4+(4x0.20)
= 4+0.80
=4.80
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New Price of cake = Old price of cake +(Old price x 0.20) 4+(4x0.20) = 4+0.80 =4.80

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Step 3

Thus, the new price of cake in 2018 would be $4.80 per unit. The quantity of cake ...

Money income of the economy
unit price of cake
Quantity of cake demanded2018
2018
900
4.80
=187.5
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Money income of the economy unit price of cake Quantity of cake demanded2018 2018 900 4.80 =187.5

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