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An Individual’s Budget Constraints
•
Suppose the government produce
M
units of fiat money in the beginning period.
Each initial old holds
M/N
units equally.
•
This trading possibility exists only if people believe that fiat money is valued in
every period.
•
Let
v
t
be the value of one unit of fiat money.
•
v
t
is the inverse of the dollar price of the consumption good,
p
t
.
•
To determine how much money individuals can acquire, we must first establish
their budget constraints or the limitations on the individual’s consumption.
•
Suppose the number of dollars acquired by individuals at time
t
is
m
t
.
•
In the first period of life, individuals face the budget constraint:
c
1,t
+
v
t
m
t
≤
y.
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In the second period of life, their budget constraint is:
c
2,t+1
≤
v
t+1
m
t
.
•
The
lifetime budget constraint –
the combination of first and second period
consumption that an individual can afford over a life time – becomes:
y
c
v
v
c
t
t
t
t
≤
⎥
⎦
⎤
⎢
⎣
⎡
+
+
+
1
,
2
1
,
1
•
⎥
⎦
⎤
⎢
⎣
⎡
+
1
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 '09
 DR.BONNIEBAFFOE
 Microeconomics

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