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Skelton
Eco 3355
Homework 2
1.
Let N
t
= n*N
t1
and M
t
= z*M
t1
for every period t, where z and n both exceed 1.
The money created in each period is used to finance government purchases for old
people (g
t
).
Prove the monetary equilibrium does not maximize the utility for
future generations.
Explain (but do not formally prove) why the feasible set line
goes through the monetary equilibrium.
2.
Let N
t
= n*N
t1
and M
t
= z*M
t1
for every period t, where z and n both exceed 1.
The money created in each period is used to finance a lump sum subsidy of a
t
goods for each
young
person.
A)
Find the equation for the lifetime budget constraint for individuals in the
monetary equilibrium.
Graph it, making sure to show an arbitrary
indifference curve that maximizes utility and also indicate c
1
and c
2
on the
graph.
B)
Determine the feasible set for this economy.
Add the feasible set to the
graph you drew in part A.
Don’t forget that the feasible set line goes
through the monetary equilibrium (as shown by c
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This note was uploaded on 04/18/2008 for the course ECON 3355 taught by Professor Skelton during the Spring '06 term at SMU.
 Spring '06
 Skelton

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