assign question 2 similar - key - Econ. 511b Spring 1998 G....

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Econ. 511b Spring 1998 G. Hall and C. Sims Final Exam The exam contains five questions. Answer all five questions. Points for each question are indicated beside the question. If you spend one minute per point you will use two hours and 35 minutes. You will have 3 hours to finish the exam. 1. (45 points) Consider an economy in which identical agents maximize EC L t tt t ±² ± ² ³ ´ µ ³ ´ µ log 2 0 ·¸ (1) subject to C B P R B P AL t t t t t ¶¶ · ² ² ³ ´ 1 1 ,( 2 ) B t ¸ 0, (3) choosing time paths for B , C and L , taking A , P and R as given. As usual, agents know all variables dated t and earlier when making choices dated t , but do not know the values of variables dated later than t when making choices at t . The government budget constraint is B P R B P G t t t t t ¶³ ² ² ³ 1 1 4 ) where G is real government purchases. Government policy sets RR t ³³ ² ± 1 (5) ³ ³ t t C ³ (6) G C G t t ³ .( 7 ) Note that the relationships in (6) and (7) characterize the behavior of the economy-wide average of taxes and spending. Individuals as usual treat taxes as lump-sum, i.e. as invariant to their individual consumption choices. We assume that the economy starts up with a positive B . a) Find the first-order conditions for a solution to the consumer’s optimization problem. b) Show that the economy has a competitive equilibrium in which PC remains constant. c) Show that this equilibrium is unique. [It is likely to be helpful to divide the government budget constraint (4) by C t and to take E t ² 1 of it, using the FOC with respect to B .]
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 d) Find the the equilibrium paths of P , C and L as functions of constants and the disturbance A t .
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 01/29/2012 for the course ECONOMICS 101 taught by Professor Tikk during the Spring '11 term at University of Toronto- Toronto.

Page1 / 5

assign question 2 similar - key - Econ. 511b Spring 1998 G....

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online