Suppose the economy has no money and people use gold for payments.

a. Discuss the effects of economic growth (an increase in the amount of goods and services that the economy produces) on prices.

b. What happens to prices when more gold becomes available, say due to new openings of gold mines?

c. Discuss the advantages and disadvantages of such a "gold standard economy.

d. Consider a situation in which both a borrower and lender think a 6 percent real interest rate would be fair. Suppose the borrower considers borrowing $100 from the lender at 10% interest rate.

i. What was the inflation rate they both expected?

ii. If the inflation rate turned out to be 7%, how much was the real interest rate? Who gained and who lost from this transaction, and how much because of unexpected inflation?

iii. If there was an interest tax of 30%, what is the after-tax real interest rate, with the inflation rate of 8%?