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
(
, )
t
t
c i
I
the real money demand function.
Here you will generate particular functional forms for
± ²
I
using the MIU model we have
studied.
In an MIU model, recall that the consumptionmoney optimality condition can be expressed
as
1
t
t
m
t
c
t
u
i
u
i
³
,
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 functions.
For each case, construct the
consumptionmoney optimality condition and use it to generate the function
± ²
I
.
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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 Spring '08
 chugh
 Economics, Monetary Policy, Federal Reserve, money demand function

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