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ps11macro2sp08 - Econ 387L Macro II Spring 2008 University...

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Econ 387L: Macro II Spring 2008, University of Texas Instructor: Dean Corbae Problem Set #11- Due 4/24/08 1. We will consider a cash-in-advance environment to study “Unpleasant Monetarist Arithmetic". The technology is given by y t = n t where n t [0 , 1] is fraction of hours worked. Preferences are given by P t =0 β t { U ( c t ) γn t } where U ( c t ) = c 1 θ t 1 θ . Households can hold money and/or government bonds. Let M t +1 and B t +1 be money (dollars) and nominal bonds (claims to dollars next period) held by households between t and t + 1 . The government expands or contracts the money supply at a constant rate μ according to M t +1 = (1 + μ ) M t . Let p t be the dollar price of consumption goods and q t be the consumption good price of a bond (so that p t q t is the dollar price of a bond). Let τ t be real lump sum taxes/transfers the government levies to help pay for its constant real expenditure g on goods. Assume that only money M t accumulated last period can be used to purchase consumption goods c t
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