ECON406 Study Guide - Midterm Guide: Budget Constraint, Capital Accumulation, Utility

• School: University of Waterloo
• Department: Economics
• Course: ECON406
• Professor: Jean-Paul Lam

Document Summary

Practice questions - miu: given the following utility function: u(ct, mt) = 1 t ) m1 where ct = ct. Pt denotes real consumption and mt = mt. The budget constraint is: real money balances. ct + kt + mt + bt = yt 1 + (1 )kt 1 + mt 1. + xt (1) (2) where kt denotes capital, yt denotes the production function and is given by yt = f (kt, mt) = t m1 k . , xt a lump-sum transfer, t is the in ation rate, bt are nominal bonds, is the depreciation rate and the capital accumulation identity is given by kt = it + (1 )kt 1. Assume for simplicity that = 1 t (i) set up the optimization problem and derive the rst order conditions. 1 m1 t )] + t[k t 1m1 t 1 + (1 )kt 1 + mt 1. + xt ct kt mt bt]}