Consider Snackistan, a hypothetical country that produces only burritos. Initial

Question

Consider Snackistan, a hypothetical country that produces only burritos. Initially, a burrito is priced at $1.00. Stasia has $200 in her wallet, and with this she can purchase burritos. Suppose the government of Snackistan cannot raise sufficient tax revenues to pay its debts. In order to meet its debt obligations, the government prints money. As a result, the money supply rises by 10 percent. If monetary neutrality holds, the 10% increase in the money supply will cause the price of a burrito to to . After the government prints money to pay its debts, the $200 in Stasia's wallet will purchase (round down to the nearest whole burrito) burritos. The impact of the government's decision to raise revenue by printing money on the value of the money in Stasia's wallet is known as the

Explanation / Answer

a) 200/1 = 200 burritos. b) 10% = 1+[(1/100)*(1)] = 1+0.01 = 1.01 c) 200/1.01 = 198 burritos. d) monetizing the debt and cause inflation.

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