325_PracticePS5

325_PracticePS5 - Department of Economics University of...

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Department of Economics University of Maryland Economics 325 Intermediate Macroeconomic Analysis Practice Problem Set 5 Professor Sanjay Chugh Spring 2011 1. Infrequent Stock Transactions. Consider a representative consumer at time t seeking to maximize the sum of discounted lifetime utility from t on, 0 () s ts s uc E f ± ¦ subject to the infinite sequence of flow budget constraints 22 tt t Pc S a Da Y ²² ± ± ± , where the notation is as in class: t a is holdings of a real asset (a “stock”) at the end of period t, t S is its nominal price in t, t D is the nominal dividend that each units of assets carried into t from period t-2 pays out, t Y is nominal income in t, t c is consumption in t, and t P is the nominal price of each unit of consumption in t. Note well how the budget constraint is written: it is assets accumulated in period t-2 that pay off in period t – thus, in this model, stocks (for some reason…) must be held for two periods, rather than being able to be traded every period. Construct the Lagrangian to compute the stock price t S in period t.
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This document was uploaded on 11/01/2011 for the course ECON 325 at Maryland.

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325_PracticePS5 - Department of Economics University of...

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