EE432: Q&As for topic 1 and reading pack for topic 2

This is the first post for this semester, welcome to EE432!

Here are some questions I get for topic 1, which are based on Blanchard and Fischer textbook.

In the text book on page 161, What is the rate of return on money? Is it n or ((the money demand @t+1) - (the money demand @t))/(the money demand@t)?

The rate of return on money is simply the change in the 'value' of money over time. In this model, money is valued relative to only one good available in the economy. The price level P_t tells us how much that good is worth relative to money, or equivalently how much money is valued relative to good. Rate of return on money is then simply P_t/P_t+1, the deflation rate! If you hold money, and it buys more goods over time, money is effectively paying a rate of return.

Also, there is a statement "we can rule out non-steady-state paths in which the price level is falling at a rate greater than n".

Does this mean that if g is greater than n, the non-steady-state is impossible?

If this is the case, why the non-steady-state is impossible.

With g greater than n, the real balance @t+1 divided by the real balance @t is greater than 1. Since this is possible, that g is greater than n should be possible, isn't it?

The last sentence of your argument is wrong. Suppose that there is a non-steady-state equilibrium where g>n. You're right that the real balance per person will keep growing over time, because money pays a higher return than population growth. As real balance per person keeps growing, it will eventually exceeds 1. That implies that each young person will have to save more than 1 unit of good. That is impossible since he is only endowed with 1 unit of good. So our assumption that there is a non-steady-state equilibrium must be false. (This is called proof by contradiction)

On the same page, does the word " a monetary equilibrium" mean the equilibrium in the money market?

Not quite. In Blanchard and Fischer, a monetary equilibrium is an equilibrium in which money is used. This is in contrast to a barter equilibrium, in which everyone ignores money and use storage technology if available. (In this model, since trade cannot take place anyway, a barter equilibrium is really the same as an autarky equilibrium, that is you are on your own and never trade with anybody)

Thanks for the questions and keep them coming.

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Here's the reading pack for topic 2.

Happy reading!