3430M_problem_set1

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

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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.
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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...
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