ps11macro2sp08 - Econ 387L: Macro II Spring 2008,...

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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
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This note was uploaded on 08/06/2008 for the course ECON 387 taught by Professor Corbae during the Spring '07 term at University of Texas at Austin.

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