# Exercises6 - EC 813A Problem Set 6 Money and Nominal...

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1 EC 813A Problem Set 6: Money and Nominal Rigidities Please, prepare for the week 24-28 th November 1. Dornbusch-Frenkel, 1973. Money as a factor of production. Consider the Sidrauski model assuming that money services are also an input in production. A simple formalization is that production is given by [1- ν (M)]f(k), where ν ( ) < 0, ν ( ) > 0, ν (0) = 1 , and ν tends to zero as m goes to infinity. β s t s = t U c s , M s p s s . t . B s + 1 + M s p s = RB s + Y s C s I s T s + M s 1 p s Y s = F K s ( ) 1 v ( M s ) [ ] K s = K s 1 + I s Characterize the steady state and contrast the effects of money growth with those obtained in the original Sidrauski model. 2. Consider the following model with money in the utility function. Assume that (i) The government can impose lump-sum taxes , τ t , and issue money m t+1 , to finance its expenditures, g t : g t = τ t + m t + 1 p t m t p t (ii) Agents get utility from consumption, c t , and from holding money, m t+1 /p. Taking the government’s behavior as given, they choose to save by investing

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