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Unformatted text preview: ECON 4721H Money and Banking Lecture 08_01 Satoshi Tanaka University of Minnesota November 14, 2011 Satoshi Tanaka ECON 4721H Money and Banking Lecture 08_01 Role of Central Bank I Model with In ation Satoshi Tanaka ECON 4721H Money and Banking Lecture 08_01 Today's Question Why does in ation matter? Should the central bank create in ation? Satoshi Tanaka ECON 4721H Money and Banking Lecture 08_01 Partial Answers In ation is bad for people. Why? However, it can be a source of government revenue : simply print money, and use it to purchase goods from the public. An extreme case of in ation: Germany in 1914-1924. Satoshi Tanaka ECON 4721H Money and Banking Lecture 08_01 OLG Model with In ation Consider the overlapping generation model where people live for two periods. Remember that we started out by assuming that the initial generation of old people received an endowment of money, m = ¯ m . Now, we're going to extend this assumption. Assume that every period the government print some amount of new money. 1 The government enters the money market (where old guys are selling money), and sell money to young guys for consumption. 2 The government gives the consumption to the old as a lump-sum transfer , a t + 1 ....
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