Money

Question 1

om “p” är pengar, vad betyder equationen

(p_t - p_{t-1})/p_{t-1}.

Answer 1

Inflation, π.

Question 2

Hur får vi fisher equality, och hur lyder den?

Answer 2

Genom att kombinera våra första två FOC i MIU och på så sätt defeniera “real interest rate” = 1 + r får vi ekvationen

(1+i_t)/1+π_{t+1}) = (1+r_t)

Genom att ta ln av det får vi approximate fisher equality:

i_t = r_t + π_{t+1}

Question 3

Vad är styrkorna och svagheterna med MIU vs CIA

Answer 3

Se FL6 slutet.

Svar från TA
MIU: Money provides transaction services and holding money affects directly the utility of agents (Sidrauski, 1967).

• Provide a simple framework to analyze monetary issues based on a clear reason for households holding money.
• ”Microfound” a money demand which is related to the nominal interest rate.
• Money is superneutral, but this does not mean that ss inflation does not affect hh. It does impact on utility and hence on welfare….But in practice it assumes the solution to the problem.

CIA: Money is held to finance purchase, it affect only indirectly the utility of agent.

• Provide a simple framework to analyze monetary issues based on a clear reason for households
  holds money.
• The implied money demand does not depend on interest rates and implies a constant velocity. This last property is unrealistic. The problem is solved in stochastic versions of the model….

Question 4

Explain breifly the two ways we have encountered money in economic models in Teadoras part of this course.

Answer 4

Money in the utility function (MIU):
Money has an intrinsic values, it makes us more happy independently on whether we can transform it in consumption or not. This way of modelling it proxies for the services money produces to facilitate transactions.

Cash in advance constraint (CIA):
Individuals need cash to purchase consumption goods, firms to pay their wage bill. Some form of nominal asset is required to facilitate transactions. Extreme assumption, there are no other means of transaction! Individuals face, in addition to a
standard budget constraint, a ”cash in advance” (CIA) constraint. Timing is crucial, cash balances are chosen before individuals know how much spending they will undertake. Therefore, we add m_{t-1} to the relative state variables.

Question 5

The optimality condition for holding money in the MUI is given by

Uc = Um + (Uct+1)/(1+pi+1)

What is the kvalitative meaning of this expression?

Answer 5

What’s the marginal benefit of money? It has two components. First, an extra unit of money has a direct impact on utility today (=Um ).

Second, by storing one unit of money at time t , real resources will increase of 1 (1+πt+1) (= inflation reduces the value of money). This last addition is worth βUct+1 at time t (= hh value extra resources because they can increase consumption in t + 1).

Question 6

What effect do money have in the MIU model?

Answer 6

The model exhibits money neutrality, that is, proportional changes in the level of nominal money balances and prices have no real effect.

Money is also super neutral.

Question 7

What variable should you maximize w.r.t if you use the lagrangian MIU?

Answer 7

Ct, mt, bt and kt.

Yes, kt not kt+1

That is, all our LHS variables in our bc.