Monetary Economics I: Financial Markets and Institutions
ECON 3430 M
Midterm Test – February 24, 2010
Professor Ahmet Akyol
Start: 1:00pm.
Finish: 2:15pm.
Show all your work. Good Luck!
Questions
1.
–60 points–
Consider an economy with a constant population of
N
= 100. Individuals
are endowed with 20 units of the perishable good when young and 10 units of the
perishable good when old. Thus,
y
1
= 20 and
y
2
= 10. Suppose that the initial old are
endowed with a total of
M
= 250 units of ﬁat money. The amount of ﬁat money in
the economy is constant (i.e.
M
t
=
M
t
+1
=
M
.)
(a) Write down the equation that represents the individual’s budget constraints in
her ﬁrst and second period of her life. Combine these constraints into a lifetime
budget constraint.
(b) Write down the condition that represents the clearing of the money market in an
arbitrary period,
t
. Using this condition, ﬁnd the real rate of return of ﬁat money
in stationary equilibrium.
(c) Suppose preferences are such that individuals wish to hold real balances of money
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview.
Sign up
to
access the rest of the document.
 Spring '10
 TASSO
 Economics, Fiat Money, Mr. Prudence

Click to edit the document details