Department of Economics
University of Maryland
Economics 325
Intermediate Macroeconomic Analysis
Problem Set 2
Professor Sanjay Chugh
Spring 2011
Due:
Monday, May 9, 2011
Instructions
:
Written (typed is strongly preferred, but not required) solutions must be
submitted no later than 11:00am on the date listed above.
You must submit your own independentlywritten solutions.
You are permitted (in
fact, encouraged) to work in groups to think through issues and ideas, but you must
submit your own independentlywritten solutions.
Groups may be no larger than four
students total, and all group members’ names must be listed on the first page.
Under no circumstances will multiple verbatim identical solutions be considered
acceptable.
Failure to adhere to these guidelines may result in your problem set not
being accepted, and a grade of zero being assigned.
Your solutions, which likely require some combination of mathematical derivations,
economic reasoning, graphical analysis, and pure logic, should be
clearly, logically, and
thoroughly presented;
they should not leave the reader (i.e., your TAs and I) guessing
about what you actually meant.
Your method of argument(s) and approach to problems
is as important as, if not more important than, your “final answer.”
Throughout, your
analysis should be based on the frameworks, concepts, and methods we have developed
in class.
There are three problems in total, each with multiple subparts.
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Problem 1:
The MoneyintheUtilityFunction (MIU) Framework (20 points).
Consider an extension of the MIU framework studied in Chapter 14. Specifically,
suppose the instantaneous (i.e., periodt) utility function of the representative consumer is
,,
t
t
t
t
M
ucn
P
§·
¨¸
©¹
, in which
P
t
denotes the nominal price during period t of the consumption
good,
t
M
denotes the nominal money holdings of the consumer
at the end of period t
(thus, the consumer’s holdings of nominal money at the start of period t is
1
t
M
±
), and
t
n
is the individual’s
labor
during period t.
(As in Chapter 2, suppose that total hours
available in any given time period is 168, and the only possible uses of time are labor or
leisure.)
The consumer’s periodt budget constraint is a slight modification of the one presented in
Chapter 14,
11
tt
t
t t
t
b
t
t
Pc
M
P B
Pwn
M
B
±
±
²²
²
²
.
Income is earned from labor supply (with
t
w
denoting the market determined
real
wage
in period t, which is taken as given by the individual), and, for simplicity, suppose there
are no stock markets (hence oneperiod riskless bonds and money markets are the only
two asset markets).
Besides these slight changes, the notation and timing of events is
identical to that in Chapter 14.
The individual’s budget constraints for period t+1, t+2, …
are identical to the above, with the time subscripts appropriately updated.
As always,
suppose the representative consumer’s subjective discount factor between any pair of
time periods is
(0,1)
E
³
.
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 Spring '08
 chugh
 Economics, Inflation, Monetary Policy, Period

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