Question

Consider Snackistan, a hypothetical country that produces only burritos. In 2016, a burrito is priced at $2.00.

Complete the first row of the table with the quantity of burritos that can be bought with $900.

Hint: In this problem, assume it is not possible to buy a fraction of a burrito, and always round down to the nearest whole burrito. For example, if your calculations result in 1.5 burritos, the answer should be 1 burrito.

Year Price of a Burrito ($). Burritos Bought with $900

2016. $2. ___________

2017. ______. ___________

Suppose the government of Snackistan cannot raise sufficient tax revenue to pay its debts. In order to meet its debt obligations, the government prints money. As a result, the money supply rises by 40% by 2017.

Assuming monetary neutrality holds, complete the second row of the table with the new price of a burrito and the new quantity of burritos that can be bought with $900 in 2017.

The impact of the government's decision to raise revenue by printing money on the value of money is known as the __________.

a. inflation tax

b. fisher effect

c. velocity

d. classical dichotomy

Answer 1