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Unformatted text preview: PRACTICE QUESTIONS FOR THE FINAL EXAM Econ 4721-002: Money and Banking Department of Economics University of Minnesota Rolling over Debt Consider an OLG with 2-period lives and constant money supply. Consumers born in each generation are endowed with 20 goods when young and nothing when old. In order to consume when old, agents can save in terms of fiat money or government bonds. Suppose that each young consumers wants to save half of the endowments. Suppose that government bonds pay net real interest rate of 3%. In the initial period, the population is 100 ( N = 100) and the government issues bonds valued 500 units of consumption goods ( B = 500). 1. What is the governments budget constraint in period t ? a. g t + B t- 1 = T t + rB t + v t ( M t- M t- 1 ) b. g t + rB t = T t + B t- 1 + v t ( M t- M t- 1 ) c. g t + B t = T t + rB t- 1 + v t ( M t- M t- 1 ) d. g t + rB t- 1 = T t + B t + v t ( M t- M t- 1 ) e. None of the above. 2. Assume constant money supply ( M t = M t- 1 , t ), and suppose that the government is not running a deficit or surplus in every period t ( g t = T t ). The government attempts to roll over the debt in the subsequent periods (i.e., issue just enough news to pay the debt issued in the previous period). Which of the following statements are true?issued in the previous period)....
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- Fall '11