Skelton
Eco 3355
Homework 1
1.
Assume an economy has a constant population of N = 100.
Each individual is
endowed with 20 units of the consumption good when young and nothing when
old.
A)
What is the equation for the feasible set of this economy?
Portray the
feasible set on a graph.
With arbitrarily drawn indifference curves,
illustrate the stationary combination of c
1
and c
2
that maximizes the utility
of future generations.
B)
Now, consider the monetary equilibrium.
Write down equations that
represent the constraints on first and secondperiod consumption for a
typical individual.
Combine these constraints into a lifetime budget
constraint.
C)
Suppose the initial old are endowed with M = 400 units of fiat money.
What condition represents the clearing of the money market in an arbitrary
period t?
Use this to find the real rate of return for fiat money.
For the rest of this problem, suppose preferences are such that individuals
wish to hold real balances of money worth:
y/(1+v
t
/v
t+1
) goods
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 Spring '06
 Skelton
 Economics, Utility, Fiat Money

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