Review for the Midterm Exam. 1.Remember! Gross rate = Net rate + 1.(Variables such as n, z, ,/1ttυυ+,/1ttpp+r, and Rare gross rates) 2.You should know the distinction between the feasible set and the budget set, and know how to derive them. The Feasible Set •Without government purchases: .,21,1yNcNcNttttt≤+−•With government purchases :.,21,1yNgNcNcNttttttt≤++−•The golden rule allocation is determined at the point of tangency between the feasible set line and an indifference curve (the slope of both lines are the same).The Budget Set •First period budget constraint: .,1ymcttt≤+υ•Second period budget constraint: .11,2tttmc++≤υ•Lifetime budget constraint: .1,21,1ycctttt≤⎟⎟⎠⎞⎜⎜⎝⎛+++υυ•These equations are the basic setup. They may alter under different assumptions, such as when taxes, transfers and capitals are presented. •The monetary equilibrium allocation is determined at the point of tangency between the lifetime budget set line and an indifference curve (the slope of budget set line equals the slope of indifference curve). 3.You can find the value of fiat money (tυ) by solving money-market clearing condition. Money-Market Clearing Condition •Supply of fiat money: .ttMυ•Demand for fiat money: ).(,1ttcyN−Rate of Return on Fiat Money •The rate of return on fiat money tells you how many goods you can obtain in the future if one unit of the good is sold for money today.