Consider the New Keynesian model where there is a representative household that con- sumes, supplies labor, accumulates bonds and accumulates money. The household gets utility from holding real balances. Its problem is: C 1-0 1+ø Eo + In 1+0 Bt max Ct,Nt,Bt,Mt t=0 s.t. PC; + Q,B + M – M-1 < B-1 + W,N – PT, Variables: Ct: consumption; N: labor; B: stock of bonds; P: price of goods; M: stock of 1 price of bonds and the implied vield is 1+i: W.: wage: T: lump-sum tax money: O.
Consider the New Keynesian model where there is a representative household that con- sumes, supplies labor, accumulates bonds and accumulates money. The household gets utility from holding real balances. Its problem is: C 1-0 1+ø Eo + In 1+0 Bt max Ct,Nt,Bt,Mt t=0 s.t. PC; + Q,B + M – M-1 < B-1 + W,N – PT, Variables: Ct: consumption; N: labor; B: stock of bonds; P: price of goods; M: stock of 1 price of bonds and the implied vield is 1+i: W.: wage: T: lump-sum tax money: O.
Chapter11: Managing Aggregate Demand: Fiscal Policy
Section: Chapter Questions
Problem 2TY
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Question
![TASK 1
Consider the New Keynesian model where there is a representative household that con-
sumes, supplies labor, accumulates bonds and accumulates money. The household gets utility
from holding real balances. Its problem is:
1-o
1+4
E,
+ In
P
1+0
max
3t
Ct,Nt,Bt,Mt
t=0
s.t.
PC; + Q;B + M – M-1 < B-1+ W;N – PT;
Variables: C: consumption; N: labor; B: stock of bonds; P: price of goods; M: stock of
money; Qt = , price of bonds and the implied yield is 1+i;; Wt: wage; T;: lump-sum tax
paid to a government.
Parameters: B: discount factor; o: coefficient of relative risk aversion; o: inverse of Frisch
elasticity.
Derive the first order conditions with respect to C, B, N and M and log-linearise the
equations around the steady state. Provide an economic interpretation of the results.
1+i](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fe91f4b6d-8019-489f-a5ee-c83b4ce1eaee%2F32ce0ca7-1513-4113-8c7f-12e61ff2709a%2F757oigt_processed.jpeg&w=3840&q=75)
Transcribed Image Text:TASK 1
Consider the New Keynesian model where there is a representative household that con-
sumes, supplies labor, accumulates bonds and accumulates money. The household gets utility
from holding real balances. Its problem is:
1-o
1+4
E,
+ In
P
1+0
max
3t
Ct,Nt,Bt,Mt
t=0
s.t.
PC; + Q;B + M – M-1 < B-1+ W;N – PT;
Variables: C: consumption; N: labor; B: stock of bonds; P: price of goods; M: stock of
money; Qt = , price of bonds and the implied yield is 1+i;; Wt: wage; T;: lump-sum tax
paid to a government.
Parameters: B: discount factor; o: coefficient of relative risk aversion; o: inverse of Frisch
elasticity.
Derive the first order conditions with respect to C, B, N and M and log-linearise the
equations around the steady state. Provide an economic interpretation of the results.
1+i
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