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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...
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 Fall '07
 AKERLOF
 Economics, Trigraph, George Akerlof, arg maxp, Andrea De Michelis, Berkeley Econ

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