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Chapter review questions QUESTION 1 In chapter 1 and 2, we modeled growth in an economy by a growing population. We could also achieve a growing economy by having and endowment that increases over time. To see this, consider the following economy: Let the number of young people born in each period be constant at N. There is a constant stock of fiat money, M. Each young person born in period t is endowed with y units of the consumption good when young and nothing when old. The individual endowment

Chapter review questions QUESTION 1 In chapter 1 and 2, we modeled growth in an economy by a growing population. We could also achieve a growing economy by having and endowment that increases over time. To see this, consider the following economy: Let the number of young people born in each period be constant at N. There is a constant stock of fiat money, M. Each young person born in period t is endowed with y units of the consumption good when young and nothing when old. The individual endowment

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Chapter review questions QUESTION 1 In chapter 1 and 2, we modeled growth in an economy by a growing population. We could also achieve a growing economy by having and endowment that increases over time. To see this, consider the following economy: Let the number of young people born in each period be constant at N. There is a constant stock of fiat money, M. Each young person born in period t is endowed with y units of the consumption good when young and nothing when old. The individual endowment grows over time so that yt- ayt-1 where a> 1. For simplicity, assume that in each period t, individuals desire to hold real money balances equal to one-half of their endowment, so that vimt=yt/2. Yt PART A: 1. Write down equations that represent the constraints on first and second-period consumption for a typical individual. Show your steps. ii) Combine these constraints into a lifetime budget constraint. Show your steps. iii) Draw the budget set together with arbitrarily located but correctly shaped indifference curves on a well labeled graph and point out the equilibrium of this decentralized monetary economy. PART B: Write down the condition that represents the clearing of the money market in an arbitrary period t. Use this condition to find the real rate of return of fiat money in a monetary equilibrium. Explain the path over time of the value of fiat money. Show all your steps and explain your answers to avoid grade penalty. 11. FEAT 111.
Transcribed Image Text:Chapter review questions QUESTION 1 In chapter 1 and 2, we modeled growth in an economy by a growing population. We could also achieve a growing economy by having and endowment that increases over time. To see this, consider the following economy: Let the number of young people born in each period be constant at N. There is a constant stock of fiat money, M. Each young person born in period t is endowed with y units of the consumption good when young and nothing when old. The individual endowment grows over time so that yt- ayt-1 where a> 1. For simplicity, assume that in each period t, individuals desire to hold real money balances equal to one-half of their endowment, so that vimt=yt/2. Yt PART A: 1. Write down equations that represent the constraints on first and second-period consumption for a typical individual. Show your steps. ii) Combine these constraints into a lifetime budget constraint. Show your steps. iii) Draw the budget set together with arbitrarily located but correctly shaped indifference curves on a well labeled graph and point out the equilibrium of this decentralized monetary economy. PART B: Write down the condition that represents the clearing of the money market in an arbitrary period t. Use this condition to find the real rate of return of fiat money in a monetary equilibrium. Explain the path over time of the value of fiat money. Show all your steps and explain your answers to avoid grade penalty. 11. FEAT 111.
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