Question

Assume that people face a lump-sum tax of goods when old and a rate of expansion of the Öat money supply of z > 1. The tax and the expansion of the Öat money stock are used to Önance government purchases of g goods per young person in every period. There are N people in every generation.
II.a. Find the individualís budget constraints when young and when old. Combine them to form the individualís lifetime budget constraint. Graph this constraint in green.

II.b. Find the government budgetís budget constraint.
II.c. Graph together the feasible set (red) and the stationary monetary equilibrium (green).
II.d. Find the stationary monetary equilibrium when z = 1 and add it to the graph (green dashed line) in part II.c.

II.e. Use a ruler on your graph to compare the real balances of Öat money when z > 1 to the values when z = 1. (3 marks

Answer 1