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Unformatted text preview: Econ 451: Homework 2 (Due Feb. 9) 1. Consider an overlapping generations model with the following characteristics. The economy has a constant population: N = 100 agents in each generation. Each agent is endowed with 20 units of nonstorable consumption good when young and nothing when old. In period 1, the initial old own a total of 1000 units of at money, M = 1000. In every period, starting from period 1, the government doubles money supply, i.e., M t = 2 M t 1 , and distributes equally the newly printed money among the old agents as a lump-sum subsidy. Preferences of all future generations (those who live for two periods) are such that at the equilibrium, each individual wishes to consume 10 units of his endowment when young and saving the rest by exchanging it for money. The equilibrium allocation is stationary over time. (a) Write down the market-clearing condition for an arbitrary date t . Find the real rate of return of at money at the monetary equilibrium. What is the gross rate of in ation...
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This note was uploaded on 04/06/2010 for the course ECON 0 at Pennsylvania State University, University Park.