3430M_problem_set1 - (c Suppose preferences are such that...

Info icon This preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
ECON 3430 Monetary Economics I: Financial Markets and Institutions Problem Set 1 – Winter 2016 Professor Ahmet Akyol 1. Consider an economy with a constant population of N = 100. Individuals are endowed with y 1 = 20 when young and y 2 = 10 when old. Suppose that the initial old are endowed with a total of M = 250 units of fiat money. The amount of fiat money in the economy is constant (i.e. M t = M t +1 = M .) (a) Write down the equations that represent the constraints on first- and second- period consumption for a typical individual. Combine these constraints into a lifetime budget constraint. (b) Write down the condition that represents the clearing of the money market in an arbitrary period, t . Do the same thing for a period, t + 1. Using these conditions, find the real rate of return of fiat money in stationary equilibrium.
Image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: (c) Suppose preferences are such that individuals wish to hold real balances of money worth y 1-y 2 ( v t /v t +1 ) 2 1 + ( v t /v t +1 ) goods where v t is the value of money in period t . Calculate the value of money, v t . Calculate the price of consumption good in period t . (d) What is the restriction on the real rate of return of fiat money so that the demand for fiat money is positive (i.e. so that a monetary equilibrium exists.). Is this restriction satisfied (please see part b .)? (e) Suppose instead that the initial old were endowed with a total of 750 units of fiat money (everything else stays the same). How do your answers to part c change? Are the initial old better off (or worse off) with more units of fiat money? 1...
View Full Document

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern