Monetary - Feb02

# Monetary - Feb02 - Increase in z means decrease in 1/z...

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Feb 02 Chapter 3 Mt = z * mt-1 Z= gross rate of money expansion Newly printed dollars : mt – mt-1= (1-1/z)Mt At = value of lump-sum transfer given to every old in t Govt. Budget constraint: Nt-1at = Mt(1-1/z) *vt Individual budget constraint: C1t + vt*mt ≤ y C2t+1 ≤ vt+1*mt + at + 1 You can derive the individuals life time bud.constraint: C1t + vt/vt+1 *C2t+1≤ vt/vt+1* at+1 Find the rate of return to money, depends on the expansion rate of the money supply Rate of return for money: Mt*Vt =(y-c1t) Nt Vt+1/vt = Mt/mt+1 = 1/z Value of money falls over time because of increased supply (but fixed demand) Inflation! Does the quantity of money hold here? It says that the price level is proportional to the stock of money in the economy. In this experiment money supply increases over every period, does M over P remain constant here? Yes, prices and money supply change at the same rate. Growth rate is = z Fig 1

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P1/p2 = MRS 1 pt This is how i save. Pt/pt+1 = vt+1/vt =1 not equal to 1 anymore instead = 1/z
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Unformatted text preview: Increase in z means decrease in 1/z slopes and intercepts have changed ‘inflation tax’ real loss in value of money (in terms of goods) induced by expansion of money supply. The expansion of the money supply ‘hurts’ all those already holding money. This tax is a proportional tax, the person with the most money is hurt the most. Is inflation optimal? Planners Problem; resource constraint NtCt + Nt-1*C2t ≤ Nt *y A transfer never enters a resource constraint. Stationary allocations; constant population etc Nt = N C1+C2 ≤ y , it is different if the government is involved. Does expanding money supply policy expand welfare? No, given that preferences are the same, but the constraint are different, that means that the consumer will choose a different c1 and c2 than the planner would have chosen for them. To see that we put the 2 constraints on the same graph. Anything that makes u hold less money is welfare reducing...
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Monetary - Feb02 - Increase in z means decrease in 1/z...

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