Question

Consider an economy in which there are 100 workers. One-half of the workers are endowed with 200 units of the consumption good when young and nothing when old. The remaining workers are endowed with 20 units of the consumption good when young and nothing when old. Each worker saves 30 percent of their endowment when young. Let the gross real return on capital be 1.25. Money supply grows according to following rule: Mt=1.1Mt-1. Assume that each worker uses 10 goods to identify themselves and make a withdrawal from a bank.

(a) For the high-income worker, compute the return on deposits.
(b) For the high-income worker, compute the return on money.
(c) For the low-income worker, compute the return on deposits
(d) For the low-income worker, compute the return on money
(e) Based on the answers to part a through d, what store of value should a high-income
worker choose? A low-income worker?

Answer 1