Question 4 Let Nt = nNt-1 and Mt=zMt-1 for every period t, where z and n are both greater than 1. The money created each period is used to finance a lump-sum subsidy of a*t goods to each young person. i) Find the equation for the budget set of an individual on the monetary equilibrium. Graph it. Show an arbitrary indifference curve tangent to the set and indicate the levels of c1 and c2 that would be chosen by an individual in this equilibrium. ii) On the graph you drew in part (a) draw the feasible set. Take advantage of the fact that the feasible set line goes through the monetary equilibrium (c*1, c*2). Label your graph carefully, distinguishing between the budget and feasible sets. iii) Prove that the monetary equilibrium does not maximise the utility of the future generations. Support your assertion with references to the graph you drew of the budget and feasible sets.
Question 4
Let Nt = nNt-1 and Mt=zMt-1 for every period t, where z and n are both greater than 1. The money created each period is used to finance a lump-sum subsidy of a*t goods to each young person.
i) Find the equation for the budget set of an individual on the monetary equilibrium. Graph it. Show an arbitrary indifference curve tangent to the set and indicate the levels of c1 and c2 that would be chosen by an individual in this equilibrium.
ii) On the graph you drew in part (a) draw the feasible set. Take advantage of the fact that the feasible set line goes through the monetary equilibrium (c*1, c*2). Label your graph carefully, distinguishing between the budget and feasible sets.
iii) Prove that the monetary equilibrium does not maximise the utility of the future generations. Support your assertion with references to the graph you drew of the budget and feasible sets.
Given:
et Nt = nNt?1and Mt = zMt?1 for every period t,where z and n are both greater than one. The money created each period is used to finance a lumpsum subsidy of a ? t goods to each young household.
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