2008spring-hw4 - period Pro f ts are zero a Write down the...

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ECO 320L-HW4 Due November 25, 2008 Classtime 1. Questions for review 4, 8, and 12 from chapter 9. 2. Problems 2, 3, and 9 from chapter 9. . 3. Questions for review 5, and 7 from chapter 10. 4. Consider a monetary intertemporal model where individuals live for 2 periods: young and old. In addition to money there is a riskless bond which pays a nominal interest rate R . Consider the problem of a young agent at time t . The real wages are w t and w t +1 at time t and t +1 . The nominal prices of consumption good are P t and P t +1 . Let C t and C t +1 be consumptions at time t (when young) and t +1 (when old), M t +1 and B t +1 are nominal money and bond holdings a young agent carries from time t to t +1 . Labor supply is inelastic (the agent does not choose labor supply) and normalized to one in each
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Unformatted text preview: period. Pro f ts are zero. a Write down the f rst period and second period budget constraint of the agent and derive his lifetime budget constraint. b Assume that the agent needs to carry money from f rst period to the second period to f nance his consumption in the second period, i.e. cash-in-advance constraint has to hold: P t +1 C t +1 = M t +1 . Plus also assume that C t = 0 so that the agent does not need to consume anything in the f rst period. Using the cash-in-advance constraint, C t = 0 , and lifetime budget constraint, derive the expression for the nominal money demand of the young agent at time t, and his consumption at time t + 1 . 1...
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