ECON406 Study Guide - Midterm Guide: Nominal Interest Rate, Budget Constraint, Money Supply

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

Document Summary

Consider the following model where households have preferences over consumption goods and real money balances: , 0 < < 1, , , > 0 (1) where ct denotes real consumption in period t and mt = mt. Pt nominal money at time t and pt is the price level at time t. The capital stock kt evolves according to: real money balances where mt is kt = xt + (1 )kt 1, 0 < < 1 where xt denotes gross investment. The household"s period budget constraint is given by: ct + xt + bt + mt yt + t + mt 1. 1 + t (2) (3) where bt = bt. Pt denotes real holdings of a one period bond, it is the nominal interest rate on the denotes a real lump-sum transfers by the government and t is the rate of in ation.