Monetary - Jan 26

# Monetary - Jan 26 - Jan 26 Decentralized Equilibrium -...

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Jan 26 Decentralized Equilibrium - Write the 3 budget constraint faced by the individual: 1. 2. 3. We have to find the rate of return to money: the price of money. Method: equating total supply to total demand M t V t = (y- C 1t )N t - T= (y-c1t)Nt divided my Mt Vt+1 /vt = 1 2pt = 2M / (y-c1) Nt – Quantity theory of money If the stock of money does not change preferences, and does not change the budget line, the constraint is not affected: then an increase in the supply of money as no effect on c 1 * and c 2 *. Money neutrality: money is neutral when it does not affect real variables (c 1 *,c 2 *) depends only on pref. and budget constraint (v t+1 /v t ) A constraint max problem; means that you try to max an object subject to a constraint Now: max utility of c 1 and c 2 Does the SME attain the Golden Rule allocation? Solution: to the planner`s problem (efficiency benchmarks) Future generations: Money also allows individuals to attain the highest possible welfare Consumption of initial old: M/N

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## This note was uploaded on 04/17/2010 for the course ECON 2450 taught by Professor Tasso during the Spring '09 term at York University.

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Monetary - Jan 26 - Jan 26 Decentralized Equilibrium -...

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