Consider Two Countries, Hitech and Lotech

question 34

Essay

Consider two countries, Hitech and Lotech. In Hitech new arrangements for making payments, such as credit cards and ATMs, have been enthusiastically adopted by the population, thereby reducing the proportion of income that is held as real money balances. Over this period no such changes occurred in Lotech. If the rate of money growth and the growth rate of real GDP were the same in Hitech and Lotech over this period, then how would the rate of inflation differ between the two countries? Carefully explain your answer.

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Definitions:

Preferred Stock

A class of ownership in a corporation that has a higher claim on assets and earnings than common stock, often including fixed dividends.

Stock Dividend

A payment made by a corporation to its shareholders in the form of additional shares, rather than cash.

Par Value

The face value of a bond or stock, representing the nominal or original value as fixed in the certificate or instrument.

Market Value

The current price at which an asset or service can be bought or sold.