Consider two economies, A and B. Both economies have the same population, supply of fiat money and endowments. In each economy, the number of young people born in each period is constant at N, and the supply of fiat money is constant at M. Furthermore, each person is endowed with y units of the consumption good when young and zero when old. The only difference between the two economies is regarding preferences. Other things being equal, people in economy A have preferences that lean toward first period consumption whereas individual preferences in economy B lean toward second period consumption. We will also assume stationarity. The lifetime budget constraints and typical indifference curves for people in the two economies are represented in the diagram below (Diagram 1). i) Will there be a difference in the rates of return of fiat money in the two economies? If so, which economy will have the higher rate of return.of fiat money? Give an intuitive interpretation of your answer. ii) Will there be a difference in the value of money in the two economies? If so, which economy will have the higher value of money? Give an intuitive interpretation of your answer.

Consider two economies, A and B. Both economies have the same population, supply of fiat money and endowments. In each economy, the number of young people born in each period is constant at N, and the supply of fiat money is constant at M. Furthermore, each person is endowed with y units of the consumption good when young and zero when old. The only difference between the two economies is regarding preferences. Other things being equal, people in economy A have preferences that lean toward first period consumption whereas individual preferences in economy B lean toward second period consumption. We will also assume stationarity. The lifetime budget constraints and typical indifference curves for people in the two economies are represented in the diagram below (Diagram 1). i) Will there be a difference in the rates of return of fiat money in the two economies? If so, which economy will have the higher rate of return.of fiat money? Give an intuitive interpretation of your answer. ii) Will there be a difference in the value of money in the two economies? If so, which economy will have the higher value of money? Give an intuitive interpretation of your answer.

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter22: Inflation

Section: Chapter Questions

Problem 25CTQ: Imagine that the government statisticians who calculate the inflation rate have been updating the...

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