This preview shows pages 1–3. Sign up to view the full content.
Monetary Economics I: Financial Markets and Institutions
ECON 3430 M
Midterm Test Solutions – February 25, 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.
The ﬁrstperiod budget constraint is
c
1
,t
+
v
t
m
t
=
y
1
The second period budget constraint is
c
2
,t
+1
=
y
2
+
v
t
+1
m
t
Combining the two, we get lifetime budget constraint
c
1
,t
+
v
t
v
t
+1
[
c
2
,t
+1

y
2
] =
y
1
or
c
1
,t
+
v
t
v
t
+1
c
2
,t
+1
=
y
1
+
v
t
v
t
+1
y
2
c
1
,t
+
v
t
v
t
+1
c
2
,t
+1
= 20 +
v
t
v
t
+1
10
1
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document(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.
The clearing of money market in
This is the end of the preview. Sign up
to
access the rest of the document.
 Spring '10
 TASSO

Click to edit the document details