Question 1 Consider the consolidated government budget constraint tt+s - 9t+s srt+s Bt-1 P 8=0 (1 + rt+8) II (1+rt+8) s=1 8=1 In steady state, Pt+s tt+8 - 9+8 r for all s = t-g for all s sr for alls srtte We also assume that the rate of growth of money supply is constant each period. Finally, assume that Pt = 1 (Note: This doesn't mean that prices are constant over time) With these simplifications, the steady state budget constraint can be written as + g=0 S=0 t-9 ST B-1 = (1+r) Further suppose that Bt-1 = $14 trillion and that the steady state value of real money balances Mt+8 = $2 trillion for all s Pt+s One final formula you will need is that for the sum of a geometric series: 1+2++3 + ... =* = for r