ps10macro2sp08ans - Econ 387L: MacroII Spring 2008,...

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Unformatted text preview: Econ 387L: MacroII Spring 2008, University of Texas at Austin Instructor : Dean Corbae Problem Set 10 Solution 1. t N t + q t B t +1 + t B t = B t + G t (1) 2. The Households problem is to solve: max T X t =0 t u ( c t , N t ) (2) subject to c t + q t B t +1 + t B t = (1 t ) N t + B t r t 1 ,t D t + D t +1 (3) 3. A competitive Equilibrium is a policy sequence ( t , t ) , an allocation sequence ( c t , N t , D t , B t ) and a price system ( q t , r t ) such that: ( i ) Given prices and taxes, the allocations ( c t , N t , D t , B t ) solve the HH problem. ( ii ) Markets clear: C t + G t = N t D t +1 = 0 B s t +1 = B d t +1 ( iii ) The sequence of taxes ( t , t ) satis f es: G t + (1 t ) B t = t N t + q t B t +1 t = 0 , 1 , 2 , ... 4. From the budget constraint of the HH we have c t + q t B t +1 + t B t = (1 t ) N t + B t r t 1 ,t D t + D t +1 c t +1 + q t +1 B t +2 + t +1 B t +1 = (1 t +1 ) N t +1 + B t +1 r t,t +1 D t +1 + D t +2 c t + q t 1 t +1 c t +1 q t 1 t +1 D t +2 + q t q t +1 1 t +1 B t +2 = 1 = (1 t ) N t + q t 1 t +1 (1 t +1 ) N t +1 r t 1 ,t D t + B t (1 t ) + D t +1 1 r t,t +1 1 t +1 q t Hence, in equilibrium we should have: q t 1 t +1 = 1 r t,t +1 I.e., arbitrage implies that in equilibrium the rates of return on the two commodities must be the same.the same....
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ps10macro2sp08ans - Econ 387L: MacroII Spring 2008,...

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