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

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Chapter 1 A Simple Model of Money Modeling Monetary Economies Bruce Champ & Scott Freeman Cambridge University Press
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Building a Model of Money Course assumptions: Rational economic agents From micro behavior to macro outcomes From simple to complex 1-2
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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
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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
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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 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
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1-7
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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
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1-9
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Properties of Indifference Curves Utility increases in the direction of the arrow (outward) Preferences are transitive: if bundle B is preferred A and bundle C is preferred to B, then bundle C is preferred to A Therefore, indifference curves cannot cross 1-10
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