People in an economy want to hold money balances worth 500 goods. If both centra

Question

People in an economy want to hold money balances worth 500 goods. If both central bank, or fiat, money and deposits at a bank pay the same return, people are indifferent between it and bank deposits. The central bank owns a stock of capital equal to the stock of fiat money. Assume the gross real return on physical capital is 1.10. The value of fiat money is two goods per dollar.

A. Suppose the central bank uses the net return to pay interest on money. What is the net return on money?

B. Suppose the central bank uses the net return to pay interest on money. What is the aggregate value of fiat money in this economy?

Explanation / Answer

THE amount of money people wish to hold is determined by three motives: transaction demand ,precautionary demand ,and asset demand . in the above question real money is equal to nominal money divided by price level $500/1.10 =454 .fiat money is a good whose value is less than the value of money it represents.the net return on money is 50$ and aggregate value of fiat money is 250 goods per dollar.

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.