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PS5 - Problem Set 5 Solutions Chapter 4#3 a Legislators...

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Problem Set # 5 Solutions Chapter 4 #3 a. Legislators wish to ensure that the real value of Social Security and other benefits stays constant over time. This is achieved by indexing benefits to the cost of living as measured by the consumer price index. With indexing, nominal benefits change at the same rate as prices. b. Assuming the inflation is measured correctly, senior citizens are unaffected by the lower rate of inflation. Although they get less money from the government, the goods they purchase are cheaper; their purchasing power is exactly the same as it was with the higher inflation rate. Chapter 4 #5 The major benefit of having a national money is seigniorage – the ability of the government to raise revenue by printing money. The major cost is the possibility of inflation, or even hyperinflation, if the government relies too heavily on seigniorage. The benefits and costs of using a foreign money are exactly the reverse: the benefit of foreign money is that inflation is no
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