Using money creation to pay for government spending

Consider Tralfamadore, a hypothetical country that produces only cakes. In 2016, a cake is priced at $4.00.

Complete the first row of the table with the quantity of cakes that can be bought with $900.

Hint: In this problem, assume it is not possible to buy a fraction of a cake, and alwaysround downto the nearest whole cake. For example, if your calculations result in 1.5 cakes, the answer should be 1 cake.

YearPrice of a CakeCakes Bought with $900(Dollars)(Quantity)20164.00

2017

Suppose the government of Tralfamadore cannot raise sufficient tax revenue to pay its debts. In order to meet its debt obligations, the government prints money. As a result, the money supply rises by 20% by 2017.

Assuming monetary neutrality holds, complete the second row of the table with the new price of a cake and the new quantity of cakes that can be bought with $900 in 2017.

The impact of the government's decision to raise revenue by printing money on the value of money is known as the .