This preview shows pages 1–4. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Unformatted text preview: p 1 ) = e 1 + ( λθ ) − 1 ∆ m 1 . (d) Thus, the exchange has to overshoot by: e − e 1 = ( λθ ) − 1 ∆ m 1 . 4. Consumption The Euler condition for the problem is: u ( c t ) = E t u ( c t +1 ) , or since utility is quadratic and so marginal utility is linear: u ( c t ) = u ( E t c t +1 ) . (a) Thus, 1 − ac 1 = 1 − bE 1 c 2 = 1 − dE 1 c 3 , or E 1 c 2 = a b c 1 and E 1 c 3 = a d c 1 . When she plans consumption in period 1, her expected income is 3 Y , she sets c 1 so that c 1 + a b c 1 + a d c 1 = 3 Y ⇒ c ∗ 1 = 3 bd bd + ab + ad Y . (b) When she plans consumption in period 2, her expected income is 3 Y + ε 1 − c 1 , she sets c 2 so that c 2 + b d c ∗ 1 = 3 Y + ε 1 − c ∗ 1 ⇒ c ∗ 2 = 3 ad bd + ab + ad Y + d d + b ε 1 . 1...
View
Full
Document
This note was uploaded on 08/01/2008 for the course ECON 202A taught by Professor Akerlof during the Fall '07 term at University of California, Berkeley.
 Fall '07
 AKERLOF

Click to edit the document details