Explain why inflation does not induce people to reduce their real balances of fiat mone in this case.

Suppose the monetary authority prints fiat money at the rate z but now does not distribute the newly Show more Suppose the monetary authority prints fiat money at the rate z but now does not distribute the newly printed money as a lump-sum subsidy. Instead the government distributes the newly printed money by giving each old person alpha new dollars for each dollar aquired when young. Assume that there is a constant population of people endowed only when young. a) Use the government budget constraint to find alpha as a function of z. b) Find the individuals budget constraints when young and old. Combine them to form the individuals lifetime budget constraint. c) what is the inflation rate (p_{t-1}/p_{t}) (v_{t+1}/v_{t}) in this case. d) compare the individuals lifetime budget constraint with the feasible set. Demonstrate that the monetary equilibrium satisfies the golden rule regardless of the rate of inflation. Explain why inflation does not induce people to reduce their real balances of fiat mone in this case. Show less

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