Suppose the money supply is currently $400, all in the hands of individuals, and

Question

Suppose the money supply is currently $400, all in the hands of individuals, and apples cost $1 apiece.

a) How many apples can those individuals buy with the money in their pockets? (This is an incredibly easy question.) Suppose the Federal Reserve prints $100 in new bills nd uses those bills to buy apples, which they give away to Janet Yellen’s mom.

b) What is the new price of an apple?

c) Suppose that the price of an apple adjusts as soon as the new dollars are printed (before the Fed gets to spend them). How many apples does Janet Yellen’s mom get?

d) Now, how many apples can everyone else buy?

e) Is there a deadweight loss? Explain why or why not.

Explanation / Answer

a) 400

b)as the money base has increased by 100. inflation =100/400=0.25. price of apple=1.25

c) 100/1.25=80

d) 400/1.25=320

e)yes dead weight loss occur becaue of increased price now consumer pay more and consume less

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