Ricardian Equivalence VS Government with Money This exercise will show you the difference between a government that can attempt to stimulate the economy by financing through taxes and borrowing and a government that can print money. a)Consider the following government budget constraint between two periods where government could print the money P₁G₁ + M₁ + (1 + i)B₁ = P₁7₁ + B₂+ M₂. What are the ways the government could finance its deficit in this economy? b) Suppose the government plans to print money at a rate of μ: M₂ = (1 + μ)M₁. Re-write the government deficit as a function of money demand where in equilibrium mª(Y, i) = Ms. Since the government doesn't plan to borrow, you could drop By from the budget constraint. P c) Suppose that people make N trips to the bank each year. Each trip cost them F for transportation cost. And the nominal interest rate is i. The average money balance is M = PY 2N Explain why people want to hold money in this economy. Derive the demand for money when people want to minimize the cost of holding money by choosing the number of trips they make to the bank each year. min PFN + iM N Is the demand for money increasing or decreasing in the following variables: income, nominal interest rate? d)Now, suppose the household knows that the government will increase the money supply every period at the rate of μ. Substitute the money demand that you derived in (c) to the government budget constraint in (b) and replace i = r + μ. e) What is the implication of government fiscal policy in this model, and how does it compare to the Ricardian Equivalence result we established earlier in this class?