Consider the standard OLG model with money and growing population. Individuals are endowed with…

Section A: Question 1-4, answer True, False or Uncertain. Briefly explain

your answer. (each question is worth 1.5 marks)

1. The lack of double coincidence of wants precludes people from using credit for transactions.

2. When the population is growing, fixing the price level is the optimal policy.

3. To finance the same amount of government purchases, using a lump-sum tax is better

than using the inflation tax (money creation).

4. In the Lucas price surprise model where monetary policy is nonrandom, the young

can always infer which island they live on no matter how the young population is distributed

between the two islands.

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Section B: Answer all 4 questions. Each question is worth 6 marks.

5. (6 marks) Consider the standard OLG model with money and growing population.

Individuals are endowed with y units of a perishable consumption good when young and

nothing when old. Individuals want to consume both when young and when old. Let

Nt = nNt-1 and Mt = zMt-1 for every period t, where Nt are the number of people born

in period t and Mt is the money stock in period t. Consider the case in which z and n are

both greater than 1. The money created each period is distributed as a lump-sum transfer

to each old individual worth at units of consumption goods. Each generation has identical

preferences where

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