Section A: Question 1-4, answer True, False or Uncertain. Briefly explain
1. The lack of double coincidence of wants precludes people from using credit for transactions.
2. When the population is growing, fixing the price level is the optimal policy.
3. To finance the same amount of government purchases, using a lump-sum tax is better
than using the inflation tax (money creation).
4. In the Lucas price surprise model where monetary policy is nonrandom, the young
can always infer which island they live on no matter how the young population is distributed
between the two islands.
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Section B: Answer all 4 questions. Each question is worth 6 marks.
5. (6 marks) Consider the standard OLG model with money and growing population.
Individuals are endowed with y units of a perishable consumption good when young and
nothing when old. Individuals want to consume both when young and when old. Let
Nt = nNt-1 and Mt = zMt-1 for every period t, where Nt are the number of people born
in period t and Mt is the money stock in period t. Consider the case in which z and n are
both greater than 1. The money created each period is distributed as a lump-sum transfer
to each old individual worth at units of consumption goods. Each generation has identical
preferences where

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