For a stationary economy, suppose the gross real interest rate on government bonds is equal to the population growth rate; that is, r = n. Assume that the government purchases 1,000 goods per young person. The outstanding stock of government debt is equal to 250 goods per young person. Taxes are used to pay for government expenditures.
a. What would taxes, per young person, be in this economy?
b. At some date t in the future, suppose r = 2n. Assume the change in the interest rate is permanent. If taxes stay constant, compute the amount of seigniorage that would be necessary to meet the government interest payments t+ 1 in date . (Assume the demand for real money balances per young person is always 100 goods.)
c. Using your answer from part b, what would the money growth rate need to be the following period.