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Unformatted text preview: Monetary Economics ECON 3430 Problem Set – October 8, 2009 Professor Ahmet Akyol 1. Explain briefly the difference between: (a) the competitive equilibrium and the Golden Rule allocation. A competitive equilibrium is an allocation in which individuals maximize their utility given prices, and these prices are determined by the equality of supply and demand (i.e. they are equilibrium prices.) The golden rule allocation is an alloca- tion in which the utility of individuals (future generations) is maximized subject to the resource (feasibility) constraint only. The difference is that prices are part of the allocation in the former; whereas they are not in the latter. Therefore, the golden rule allocation is the best allocation the society can achieve whereas the competitive equilibrium does not have to coincide with the Golden rule allocation, and therefore, maximizes the utility of all future generations only under certain consitions. (b) the competitive monetary equilibrium and the autarkic equilibrium. The competitive monetary equilibrium is a competitive equilibrium in which fiat money is valued, and, therefore, traded in exchange for the consumption good. The autarkic equilibrium is an equilibrium in which no trade takes place, and therefore, individuals consume their endowment....
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