Question

What is the lottery payment plan implied rate of time preference (approximation is ok)? If you decide to take the lump sum is your time higher or lower than the lottery payment plan's time preference? How would your expectations of future inflation/deflation effect your decision on choosing lump sum versus annuity? Show the table of your annuity payment calculations. 20 3. You are given a Simple Closed Economy with ONE GOOD and ONE CURRENCY with an initial (year 1) annual GDP of 10,000 goods and a STATIC money supply of 10,000 units of currency. What would you expect to happen to the price level and production of goods in this closed economy over time (10 years)? Explain your answer and show your supporting calculations. (NEXT PAGE FOR ADDITIONAL AND BONUS QUESTIONS)

need help

Answer 1

3. Since the money supply is static, this can't be changed over time. The time period of 10-years indicates long run. The price level would increase in the long-run, since time value of money decreases in future. Once the money gets depreciated, it losses purchasing power. This tends to increase inflation. Graph: Price level LRAS SRAS1 SRAS P2 E2 ΡΟ EO AD1 AD Q0 Real GDP Long run aggregate supply (LRAS) curve is parallel to the vertical axis (price level), indicating that the aggregate supply in the long-run doesn't depend on the price level. The|| potential level of real GDP is QO and price is Po, because LRAS, AD, and SRAS curves meet at the corresponding E0 point. Now, suppose the purchasing power of money decreases. It requires more money to spend for input facilities (land, labor, materials, etc.); but money has static supply, which can't be

increased over time. Therefore, the shortage of input facilities arises, which reduces SRAS – the curve will shift to the left. Since the supply is low, it increases demand in the market. The AD curve will shift to the right as AD1.

Again the potential level of production establishes at E2 point, where price level rises to P2 by keeping the same production level, Q0.