Lec3 - An Individuals Budget Constraints Suppose the...

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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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Lec3 - An Individuals Budget Constraints Suppose the...

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