Inflation

Question 1

Give 6 costs to inflation

Answer 1

• Uncertainty about relative price change vs general price change.
• Uncertainty about future price level makes it difficult to make optimal decisions.
• Distortion between progressive tax system and inflation
• Benefits debtors and hurts creditors
• Distorts unit of account info
  -detrimental to growth

Question 2

What is the size of transfer to old in period t?

Answer 2

at = (1-1/z)vtMt/Nt-1

Question 3

What is optimal monetary policy in OLG?

Answer 3

z=1 which means a=0

Question 4

What is optimal inflation when n>1?

Answer 4

When z=1, ROR money = n so gross inflation is 1/n, which means when n>1, net inflation optimal < 0, so DEFLATION