PS4 - Economics 475 Part II Problem Set 4 1. (OLG with...

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Economics 475 Part II Problem Set 4 1. (OLG with money) Consider the overlapping-generations model discussed in class. Specifically, agents live two periods and supply labor only when young. Suppose utility is log ( c y ) + βlog ( c o ). There is no productivity or population growth. Suppose that M pieces of paper are introduced into the economy and given to the currently old generation. The pieces of paper have no intrinsic value. Suppose that p t is the price level at time t (that is, one piece of paper buys 1 p t units of goods.) (a) Write the young generation’s problem assuming they anticipate a price level p t +1 next period. (b) What is the equilibrium relationship between the marginal product of capital and inflation ( p t +1 /p t )? (c) Write the law of motion for the aggregate capital stock. (d) Describe the existence and characterization of a steady state in which money is valued in equilibrium and the value of money does not exceed the aggregate value of goods produced in the economy? Is the steady state equilibrium Pareto Optimal relative to a
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This note was uploaded on 09/06/2011 for the course ECO 475 taught by Professor Hong during the Fall '07 term at Rochester.

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PS4 - Economics 475 Part II Problem Set 4 1. (OLG with...

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