General Cards Flashcards
What is the budget constraint of an individual under stationary equilibrium?
C1+C2=Y
Explain Neutrality of Fiat money stock.
The size of nominal fiat money stock will not affect real consumption or money demand.
Rate of Return of money is also not affected by the stock of money
This is because the money stock terms cancel each other out; Mt and Mt+1 for example.
Does the Stationary Monetary equilibrium obey the Golden Rule? Explain.
It does obey as the equilibrium point is where the budget set and the feasible set are tangent to each other
What is meant by the budget set and the feasible set?
BS: The individual’s constraint.
FS: The constraint on the entire economy as found by the social planner
Does the Monetary Equilibrium obey the golden rule?
Monetary Equilbrium does not maximise the golden rule.
It does maximise the consumption profile for the initial Old generation, which the stationary equilibrium does not.
However, if it has constant fiat money stock, it will obey the golden rule
Explain the two generation model where there is a growing population.
Give expressions for both the budget set and the feasible set.
Also give C1 and C2 Intercepts for the graphical representation
Imagine that : Nt=nNt-1
Where n is a constant that shows gross increase in population.
Feasible Set:
NtC1+Nt-1C2=y
Divide by Nt:
C1 +(Nt-1/Nt)C2=y
Therefore
C1+ (1/n)C2=y
Budget Set:
Nt+1/Nt = nNt/Nt=n Vt+1/Vt= n
This shows that the rate of return on money is equal to the growth in population.
C1:Y
C2:nY
IF you know that C1+(1/n)C2=y,
What does it mean about the function I front of C2?
(Vt/Vt+1) is the function.
Give a definition of Money.
What two things must hold to give money value?
Money is a medium of exchange whose purpose is to make it easier to trade consumption goods between individuals.
- There must be friction to trading goods (people cannot costlessly trade).
- Money must have a store of value function between periods. Meaning that people are willing to hold it across numerous periods.
Define the overlapping generations model, define each term and give details of the assumptions.
Y is endowment good given to individuals who are born in P1.
Y does not transfer value to P2.
Nt is the number of individuals that are born in period t.
Assumptions;
- An individual’s utility will increase with their consumption in either periods.
- An individual will want to consume positive values of consumption goods in both periods.
- To receive a single unit of consumption tomorrow, the individual must give up some consumption today.
In the overlapping generations model, who are the initial old?
They are individuals who are in the second period when the model begins. They are the initial old people.
They will want to maximise their consumption level, and do not want to save. However in the stationary equilibrium they are endowed with nothing.
How does trade with money help fix efficiency issued and problems with the initial old in the first period of the model?
The initial old will be given some money which they can trade with young to get consumption good to consume in this period.
The young will take some money and keep some consumption good. They can then trade the same in the second period of their life to get consumption good from the young. This allows them to consume efficient amounts in both periods as each individual will have a different consumption profile.
Explain the quantity theory of money
QTOM Predicts that the price level will be exactly proportional to the quantity of money in the economy.
Vt=(Nt(y-C1,t))/Mt
Pt=1/Vt
What is a commodity money?
It is a commodity that you will trade in order to consume the good you actually want later on.
Commodity money has intrinsic value.
What is Barter?
Where the goods one owns are directly traded for the goods which one wants to own.
Explain the Model of Jevon’s double coincidence of wants?
There are J different goods in the economy and you are given y units of storable good i. There are M units of money.
- People live on spatially seperated islands. Those on the same island have the same tastes and endowment.
When people become old they want to consume a good they’re not endowed with.
They are randomly paired and decide whether to trade.
This cost of trade is a.
You cannot consume your intial endowment so
J^2-J is the number of attempts before success.
Prob of a match would be 1/(J^2-J)
Mean number of fails is fail over success.
1-(1/J^2-J) / (1/J^2 - J)
= (J^2-J)-1
Search cost of barter: a(J^2-J)
