Consider a random-relocation economy where each young person receives 10 units of the consumption good. There are 100 young people born each period. The total stock of money is constant and equal to $500. The consumption good can be transformed, one to one, into capital, which will give a return of x > 1 next period. Suppose a personís preferences are such that they want to consume 1/2 of their endowment when young 2 of ECON20532 and 1/2 when old. They all dislike risk. We also assume that the probability that a person is relocated is 10% (known to everybody) and the gross return on capital is 1.1. A person is notifed whether she needs to relocate or not at the end of period 1. A person who relocates can take with her money, but not capital. Individual agents cannot invest directly in capital, but there exists a (perfectly competitive) banking sector that accepts deposits from all young people. (a) What is the state contingent rate of return o§ered by banks on deposits? (b) Write down and explain the money-market clearing condition for this economy. Derive the equilibrium value of money. (c) How could the government achieve equal return for the movers and non-movers? How would that work? (d) Assume now that population grows 10% per period. What is the rate of return on money in this economy? Explain your results.
Consider a random-relocation economy where each young person receives 10 units of the consumption good. There are 100 young people born each period. The total stock of money is constant and equal to $500. The consumption good can be transformed, one to one, into capital, which will give a return of x > 1 next period. Suppose a personís preferences are such that they want to consume 1/2 of their endowment when young 2 of ECON20532 and 1/2 when old. They all dislike risk. We also assume that the probability that a person is relocated is 10% (known to everybody) and the gross return on capital is 1.1. A person is notifed whether she needs to relocate or not at the end of period 1. A person who relocates can take with her money, but not capital. Individual agents cannot invest directly in capital, but there exists a (
(a) What is the state contingent
(b) Write down and explain the money-market clearing condition for this economy. Derive the equilibrium value of money.
(c) How could the government achieve equal return for the movers and non-movers? How would that work?
(d) Assume now that population grows 10% per period. What is the rate of return on money in this economy? Explain your results.
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