Monetary-Feb04 - Is Inflation efficient? Compare the S.M.E...

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Is Inflation efficient? Compare the S.M.E to the G.R.A SME: Solution to the decentralized economy (without an expanding money supply) GRA: solution to the planners problem Fig1: Lifetime budget constraint: Resource Constraint: Given that these two constraints are different, inflation will be inefficient. Therefore the decentralized economy will not solve the planner problem. Fig2: SME B lies on the edge of the feasible set. you will not consume in the inferior of the feasible set because you will be wasting resources. not consistent with utility maximization not consistent with utility maximization you will not consume outside the feasible set unattainable If we gave this problem to a planner, he would choose point A. Market economy on its own its going to choose B. Since B is in the stationary monetary equilibrium, it reflects a tangency between budget constraint and I.C U 0
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Because the resource constraint goes through B but at a different slope, it cannot also be tangent to the I.C U0
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This note was uploaded on 04/17/2010 for the course LAPS ECON2450 taught by Professor Tasso during the Spring '10 term at York University.

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Monetary-Feb04 - Is Inflation efficient? Compare the S.M.E...

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