Suppose the quantity theory holds at all points in time so that there is an immediate...

Transcribed Image Text:

Suppose the quantity theory holds at all points in time so that there is an immediate and full response of the price level (and no response of either velocity or output) of a change in the total stock of money in the economy. Andy, Martha, and Chris make up the whole population in this economy; their holdings of money are $70, $50, and $80, respectively. Assume that the government's holdings of money are zero (the total stock of money is the amount of money held by both consumers and the government). Suppose now that, as a statement of protest against his former employer the Council of Economic Advisers (Andy used to be an economist there) and on live TV, Andy burns all his money. (a) Does Andy's money fire destroy real resources? Explain. (b) Does the money fire change the distribution of real wealth of the different people in this economy? Assume that the money was all the wealth of these consumers (i.e., they owned no other assets) and try to calculate how the money fire changed the real distribution of wealth. (c) If Andy's fire was observed by Chair Powell and, as a result, he instructed her New York Fed crew to issue $70 to fully sterilize Andy's money fire (i.e., so that the total money stock remained at $200), what would the implication have been in terms of wealth redistribution? You may assume that the new money issue is a purchase of a $70 government bond directly from the government. Suppose the quantity theory holds at all points in time so that there is an immediate and full response of the price level (and no response of either velocity or output) of a change in the total stock of money in the economy. Andy, Martha, and Chris make up the whole population in this economy; their holdings of money are $70, $50, and $80, respectively. Assume that the government's holdings of money are zero (the total stock of money is the amount of money held by both consumers and the government). Suppose now that, as a statement of protest against his former employer the Council of Economic Advisers (Andy used to be an economist there) and on live TV, Andy burns all his money. (a) Does Andy's money fire destroy real resources? Explain. (b) Does the money fire change the distribution of real wealth of the different people in this economy? Assume that the money was all the wealth of these consumers (i.e., they owned no other assets) and try to calculate how the money fire changed the real distribution of wealth. (c) If Andy's fire was observed by Chair Powell and, as a result, he instructed her New York Fed crew to issue $70 to fully sterilize Andy's money fire (i.e., so that the total money stock remained at $200), what would the implication have been in terms of wealth redistribution? You may assume that the new money issue is a purchase of a $70 government bond directly from the government.

Answer rating: 100% (QA)

Andys money fire and its effects on wealth distribution a Does Andys money fire destroy real resources NoAndys money fire doesnt destroy real resource... View the full answer