1 Summary and Goals

We continue to look at economic models that help us understand the role of money in society and what kinds of positive impacts and uses it can have.

First, we look at the overlapping generations model, an idea that shows how money can be used to help “smooth out” consumption over a lifetime of varying income levels, making everyone better off.

In this, we will see that, with the introduction of something that can serve as money in this model, it can increase everyone’s happiness.

Next, we see a model of money as a magical record-keeper, remembering a perfect history of all previous transactions. This has a close correlation to what Bitcoin and other cryptocurrencies actually are!

2 Reading

• Dr. Rothert’s notes on the OLG model
• Kocherlakota, “The Technological Role of Fiat Money”, Federal Reserve Bank of Minneapolis Quarterly Review, 1998.
• Samuelson, “An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money”, Journal of Political Economy, 1958. (Optional reading)

3 Check your understanding

Here are some important topics you should understand and be able to define and say why it is important:

• Diminishing marginal utility of consumption
• Competitive equilibrium
• Pareto efficiency

And here are some questions you should be able to answer:

• Why do we study economic models that are clearly fake?
• What role does money serve in the two-generation OLG model?
• What is each generation trying to maximize? What does that mean?
• What does it mean to say that “money is memory”?