Consider Tralfamadore, a hypothetical country that produces only cakes. In 2013,

Question

Consider Tralfamadore, a hypothetical country that produces only cakes. In 2013, a cake is priced at $4.00 Complete the first row of the table with the quantity of cakes that can be bought with $900. Hint: In this problem, assume it is not possible to buy a fraction of a cake, and always round down to the nearest whole cake. For example, if your calculations result in 1.5 cakes, the answer should be 1 cake. Year 2013 2014 Price of a Cake (Dollars) 4.00 Cakes Bought with $900 (Quantity) Suppose the government of Tralfamadore cannot raise sufficient tax revenue to pay its debts. In order to meet its debt obligations, the government prints money. As a result, the money supply rises by 20% by 2014. Assuming monetary neutrality holds, complete the second row of the table with the new price of a cake and the new quantity of cakes that can be bought with $900 in 2014 The impact of the government's decision to raise revenue by printing money on the value of money is known as the

Explanation / Answer

Solution:-

In 2013, with $900 you will be able to buy 900 / 4 = 225 cakes.

As the money supply is increased by 20% the prices will also rise by 20%. Hence the new price in 2014 will be $4.8. With $900 in 2014, you will be able to purchase 900 / 4.8 = 187 cakes.

The impact of the government's decision to raise revenue by printing money on the value of money is known as the inflation tax.

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

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