1. (50 points) Consider a finite-period economy, the final period of which is period T (so that there is no period 7 + 1) every agent in the economy knows that period T is the final period of the economy. In this economy the government conducts both fiscal policy (engaging in government spending and collecting taxes and monetary policy (expanding or contracting the money supply). The timing of fiscal policy and monetary policy will be described further below. The economy has now arrived at the very beginning of period 7 , and the period-T consolidated government budget constraint is Mt - Mr-1+ Bi+ Prtr = (1+iT-1)Br-1 + Pigr. Once period T begins, the economic objects yet to be determined are tr, gr, Mr, and Br. a. Compute the numerical value of By? Show any important steps in your computations/logic. b. Suppose for iT-1 = 0.10, By-1 = 10 (i.e., the government is in debt at the beginning of period , given the definition of Be), Pr-1 = 1 (notice the time subscript here), and My-1 = 01. The timing of fiscal policy and monetary policy is as follows: at the beginning of any period t, the monetary authority and the fiscal authority independently decide on monetary policy (the choice of M ) and fiscal policy (the choices of to and gt ), respectively. Assume also that the nominal price level is flexible. Suppose that the fiscal side of the government decides to run a primary real fiscal surplus of tr -gr = 9 in period T. Also suppose that the monetary authority chooses a value for My which when coupled with this fiscal policy implies that there is zero inflation between period T - 1 and period T. Compute numerically the real value of seignorage revenue the government earns in period T, clearly explaining the key steps in your computations/logic. Also provide brief economic intuition for why the government needs to generate this amount of seignorage revenue in period T? c. Suppose that the monetary authority sticks to its monetary policy (i.e., its choice of My) you found in part b above. However, the fiscal authority decides instead to run a primary real fiscal surplus of tr - gr = 8. Compute numerically the real value of seignorage revenue the government must earn in period T as well as the inflation rate between period T -1 and period T. Clearly explain the key steps in your computations/logic. In particular, why is real seignorage revenue here different or not different from what you computed in part b? d. With "complete stickiness" of the price level, is a monetary policy that sets the level of My you found in part b consistent with a fiscal policy that sets a real fiscal surplus of tr - gr = 8 as in part c? In other words, can those policies work simultaneously? Explain carefully why or why not, using any appropriate mathematical or logical arguments. e. Reviewing the scenarios posed in parts b, c, and d, address the following question in a brief discussion: what is the role of fiscal policy in determining the inflation rate and/or the nominal price level in the economy? If possible, connect your remarks to the debate between the RBC view and the New Keynesian view