Fixed amount of fiat money was created by the government

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Imagine economy where everyone lives for 2 periods: youth and old age. Each period a new generation of young people is born equal in size to last period's old generation, who are now gone. Time goes on forever. Suppose there are 20 people at any time, 10 young and 10 old. Each young is endowed with 10 units of a perishable consumption good- it only lasts one period. People have no income in old age. There is no capital, no investment. Clearly every young person would like to save, in order to consume in old age. Unfortunately, lending to each other won't work, since all are alike and want to save, while lending to the old won't work, because they won't be around to pay off the loan! This economy bears striking resemblance to our complete lack of double coincidence economy. How? In that economy, money solved the problem. How might money do the same here? Imagine, for example, the fixed amount of fiat money was created by the government and given to the people at the time. How might it improve things? Why is it important to the success of your plan that time go on forever?

Reference no: EM131005131

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