Monetary - Jan28

Monetary - Jan28 - If I give up all my endowment for money...

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January 28 Chapter 3 Allow for an expansion of the money supply Fixed population: N t =N for all t The stock of money expands at a constant rate z > 1 (gross rate of expansion) Z= 1.05 How many new dollars? M t – M t-1 (newly printed dollars) M t = z*M t-1 M t – M t-1 = M t –m t /z = (1 -1/z) M t Diagram1: a t = transfer to every old person in real terms made possible by the printing of new dollars Lump sum = unrelated to any activity undertaken by the individual Expense – transfer to old people Revenue – printed money Real government budget-constraint: a t Nt-1= (Mt-Mt-1) vt Equation2: Monetary Equilibrium -Solve the problem of the individual, write down the budget constraints -1 st period: NOTE 3
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January 28 Differences between budget lines with and without money expansion: 1. Different intercepts 2. Different slope
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Unformatted text preview: If I give up all my endowment for money in t: I will pocket Pty in t+1 how many goods can I buy? Pty/pt+1 = y/z Equation 3: In order to get more unit of C2 you have to give up more C1 than if z=1 Printing money has costs: when you print money the people that hold money lose goods, this property is called an inflation tax, because it takes away some of your purchasing power. It is considered to be a proportional tax. T =t*Y. It is a bad tax because it is a proportional tax, because it distorts your behaviour. Holding money is good, because it allows you to trade, you are going to end up buying a different combination of c2 and c1 if there wasnt a inflationary tax. Ex: being hit with 90% tax, so then you will work less to avoid being hit by such a high %....
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Monetary - Jan28 - If I give up all my endowment for money...

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