Question

5. Using money creation to pay for government spending Consider Kharkeez, a hypothetical country that produces only burgers. In 2019, a burger is priced at $4.00. Complete the first row of the table with the quantity of burgers that can be bought with $700. Hint: In this problem, assume it is not possible to buy a fraction of a burger, and always round down to the nearest whole burger. For example, if your calculations result in 1.5 burgers, the answer should be 1 burger. Price of a Burger (Dollars) 4.00 Burgers Bought with $700 (Quantity) Year 2019 2020 Suppose the government of Kharkeez 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 2020. Assuming monetary neutrality holds, complete the second row of the table with the new price of a burger and the new quantity of burgers that can be bought with $700 in 2020. The impact of the government's decision to raise revenue by printing money on the value of money is known as the

Answer 1

Answer:

Price of burger rise by 20% in 2020 due to increase in the money supply

Thus,

Year	Price of a Burger($)	Burgers Bought with $700(Quantity)
2019	4.00	700/4 = 175
2020	4 + (20%*4) = 4 + 0.8 = 4.8	700/4.8 = 145

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

The impact is inflation tax as it reduced the value of money due to inflation.