In this chapter, there are two new things to include in our analysis. First, we analyze random, unforecastable changes in monetary policy. In Chapter 5, we studied how permanent, anticipated changes to the fiat money stock growth rate would affect the return and welfare. Now we can talk about monetary surprises and their effects.

So far, we have shown that money is memory, it reduces transaction costs compared with barter, and it frees up resources compared with a commodity money economy. In Chapter 3, we focused on the demand for money. All good things. The next step is to consider how changes in money supply affect economic decisions.

In Chapter 8, we started with new stores of value that were perfect substitutes for fiat money. In these economies, we learned that if the return on other assets is greater than that of fiat money, fiat money will not be valued. Yet, when you look around, you see that fiat money is valued in many real economies even though other assets, like capital, have a greater return than fiat money.

In earlier chapters, we used the overlapping generations model as a model of money. People needed money, whether fiat, commodity, or inside money, to acquire a market good. We did not interpret this good literally as consumption in old age, because money balances are a trivial source of savings for retirement. We used the overlapping generations structure as a simple way to model exchange without taking the age of the model’s people very seriously.

This chapter introduces those rights and freedoms that are considered core to the democratic process. Those freedoms (often labelled ‘civil liberties’) ensure that individuals are able to circulate and obtain information freely, are able to participate in the election of representatives (and governments) and are able to peacefully – and collectively – make public demonstrations of political viewpoints without incurring criminal sanctions. In turn this chapter will therefore consider freedom of expression, freedom of assembly, the liberty and security of the person, and the right to vote.

We begin by examining the key purpose of a constitution: the definition and allocation of governmental power. Following this – using examples – the chapter proceeds to illustrate the various functions that such devices are meant to perform and the differing forms that constitutions can take. It then goes on to introduce the UK constitution, noting its key characteristics and comparing them with those of constitutions elsewhere.

The models we have presented to this point have had a government creating fiat money and taxing or providing transfers to people in the economy. Although these are important aspects of government finance in today’s world, we have neglected one critical factor. Governments frequently finance current deficits by borrowing.

In this chapter, we extend the basic overlapping generations model so that we can examine other ways in which people pay for things. We have delved into economies in which fiat money can be used to execute trades between people from different generations by solving the record-keeping friction.

During the 2020 COVID pandemic, the United States passed the Coronavirus Aid, Relief, and Economic Security Act. The goal was to provide immediate relief to families and businesses affected by the actions implemented to curtail the spread of the coronavirus. With declining tax revenues, the U.S. government relied on deficits in order to finance these spending increase. The attention from the media, politicians, and economists focused sharply on deep divisions regarding the efficacy of such spending packages to stimulate economic activity.