Question - 1 In an economy with n households, assume a household's utility depends on the quantity of goods consumed, X, and on real money balances, M/P. U = x/a (M/P)a Let the household have initial endowments Xo of goods and Mo of nominal money balances. The budget constraint faced by the household is then, in nominal terms: PX + M < PXo + Mo. (a) What is the potential justification of the inclusion of money in the utility function? (b) Is money neutral in this economy? Discuss analytically. (c) If the economy was characterized by limited participation in financial markets, would your results change? Provide intuition without deriving the model.
Question - 1 In an economy with n households, assume a household's utility depends on the quantity of goods consumed, X, and on real money balances, M/P. U = x/a (M/P)a Let the household have initial endowments Xo of goods and Mo of nominal money balances. The budget constraint faced by the household is then, in nominal terms: PX + M < PXo + Mo. (a) What is the potential justification of the inclusion of money in the utility function? (b) Is money neutral in this economy? Discuss analytically. (c) If the economy was characterized by limited participation in financial markets, would your results change? Provide intuition without deriving the model.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Question - 1
In an economy with n households, assume a household's utility depends on the
quantity of goods consumed, X, and on real money balances, M/P.
U = xVa (M/P)Va
Let the household have initial endowments Xo of goods and Mo of nominal money
balances. The budget constraint faced by the household is then, in nominal terms:
PX + M < PXo + Mo.
(a) What is the potential justification of the inclusion of money in the utility
function?
(b) Is money neutral in this economy? Discuss analytically.
(c) If the economy was characterized by limited participation in financial markets,
would your results change? Provide intuition without deriving the model.
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