To stabilize output the fed needs to increase m it

This preview shows page 5 - 7 out of 11 pages.

To stabilize output the Fed needs to increase M.It can:a)buy bondsb)lower discount ratec)reduce reserverequirements
II-Consumption TheoryConsider a consumer called Ms. Ada. Ms. Ada receives after-taxincome of 2 goods in the first period and 4 goods in the second. Sadly for Ms. Ada, she only lives and consumes for two periods. Assume that β=1 and her preferences are given by MU(c)=1/c, and Ms. Ada can borrow and save freely at interest rate ra)What is the tangency condition for Ms. Ada? What does it mean intuitivelyand why does it haveto hold?(6 points).
b)What is Ms. Ada’s intertemporal budget constraint? (2 points)
c)Using your answers to parts a) and c), deriveMs. Ada’s consumption function.(2 points)5
2
d)Solve for Ms. Ada’s consumption in the first period (i.e. c1A) for two different cases: 1+r =1 and 1+r =2.(2 points)
Suppose that the government wants to raise Ms. Ada’s consumption by cutting her taxes in both periods. Specifically, the government reduces her taxes by two units in both the first period and the second period. e)What is the new intertemporal budget constraint for Ms. Ada? (2 points)

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture