325_PracticePS7

325_PracticePS7 - Department of Economics University of...

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Department of Economics University of Maryland Economics 325 Intermediate Macroeconomic Analysis Practice Problem Set 7 Professor Sanjay Chugh Spring 2011 1. Deriving a Money Demand Function. Denote by ( , ) tt ci I the real money demand function. Here you will generate particular functional forms for ± ² ³ using the MIU model we have studied. In an MIU model, recall that the consumption-money optimality condition can be expressed as 1 t t m t ct u i ui ´ , where t m u denotes marginal utility with respect to real money balances and t c u denotes marginal utility with respect to consumption. In each of the following, you are given a utility function and its associated marginal utility func t ions . Fo r each case , cons t ruc t the consumption-money optimality condition and use it to generate the function ±² ³ . In each case, your money demand function should end up being an increasing function of t c and a decreasing function of t i . ( Note: Be careful to make the distinction between real money holdings and nominal money holdings. The marginal utility function
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This document was uploaded on 11/01/2011 for the course ECON 325 at Maryland.

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325_PracticePS7 - Department of Economics University of...

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