ECON406 Study Guide - Final Guide: Budget Constraint, Market Clearing, Utility

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

Document Summary

Olg with money: consider the following olg model with money. The individual endowment grows over time so that yt = yt 1 where > 1. For simplicity, assume that in each period t individuals desire to hold real money balances equal to one-half of their endowment so that mt pt. 2 : write down the equations representing the constraints on rst- and second-period consump- tion for a typical individual. Answer: second period budget constraint is: c1,t + 2: combine these constraints into a lifetime budget constraint. The real rate of return of at money is. Rewriting the above in stationary equilibrium, knowing that mt = mt+1 and nt = nt+1, using the fact that y1,t c1,t = yt. 2 and yt+1 = yt, we have: yt+1 pt pt+1. 1: carefully explain the path over time of the value of money. Answer hence the real return of money grows at the rate over time.