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Assume a government is financing expenditure by printing money. Assume Mt = zMt-1 where z>1 and that the new of money is introduced into the economy through lump-sum transfers to each old person in period t. The new money is worth at units of consumption good. Answer the following:
a) What is the value of money creation?
b) Using the first period and second period budget constraints, compute the rate of return for money
c) Compute the rate of change of the price level
d) Show graphically the budget set with inflation
e) Is printing money an efficient way for the government to raise revenue?
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