Chapter_01 - Chapter 1 A Simple Model of Money Modeling...

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Unformatted text preview: Chapter 1 A Simple Model of Money Modeling Monetary Economies Bruce Champ & Scott Freeman Cambridge University Press Building a Model of Money • Course assumptions: – Rational economic agents – From micro behavior to macro outcomes om simple to complex – From simple to complex 1-2 Building a Model of Money • Demand for goods: utility from consumption • Demand for money: medium of exchange • Model incorporates two features: – Trade without money is costly – Time matters • Overlapping generations model 1-3 The Environment • Individuals live for two periods: young and old • N t individuals are born in period t • Only one good • Good is perishable • Individuals receive a good endowment equal to y when young 1-4 1-5 Preferences • c 1,t is the consumption of an individual born in period t when young • c 2,t+1 is the consumption of an individual orn in period hen old born in period t when old • Individuals rank bundles of intertemporal consumption • Indifference curves: set of consumption bundles yielding equal utility to an individual 1-6 1-7 Properties of Indifference Curves • Diminishing marginal rate of substitution (curve gets flatter to the right) • Indifference curves never cross either axis • All possible bundles are part of one (and only one) indifference curve • Indifference maps: group of indifference curves 1-8 1-9 Properties of Indifference Curves • Utility increases in the direction of the arrow (outward) • Preferences are transitive: if bundle B is...
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Chapter_01 - Chapter 1 A Simple Model of Money Modeling...

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