Consider a three-period decision problem: max u(co) + 3u(c)+B*u(cz) subject to the flow budget constraints for...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Consider a three-period decision problem: max u(co) + 3u(c)+B*u(cz) subject to the flow budget constraints for t = 0, 1, 2: bt+1 = = (1 + r)bt + Yt - Ct, where bo is the initial wealth of the country. 1. Explain why in this three-period model it cannot be that b3 <0 and it should not be that b3 > 0. 2. Given this, use the flow budget constraints to derive the intertemporal budget con- straint: C1 C2 Y2 Co + = (1 + r)bo + yo + + 1+r (1+r)² + Y1 1+r (1+r)²¹ Interpret this equation. 3. Show that the intertemporal budget constraint is equivalent to nxi NX2 (1+r)bo+nxo + + = 0, 1+r (1+r)² where nx=yt - c. Explain why it is also equivalent to bo + cao + cai + ca₂ = 0, where carb, +nx₁ = b₁+1b₂. When is it possible to have nx < 0 for every t = 0, 1, 2 and why? Which country that we discussed might fit this description? Does it violate the logic that all trade deficits must be compensated by trade surpluses? 4. Using your favorite method, derive the intertemporal optimality conditions for t= 0, 1: u'(c) = B(1 + r)u' (C₁+1). 5. Assume bo = 0 and 3 = 1 and r = 0. Solve for consumption co, net exports não, and current account cao, by defining the concept of permanent income y. Interpret your results by providing examples for different yo and y. Discuss intuitively how the result change when bo < 0, 3 < 1, and r> 0. Consider a three-period decision problem: max u(co) + 3u(c)+B*u(cz) subject to the flow budget constraints for t = 0, 1, 2: bt+1 = = (1 + r)bt + Yt - Ct, where bo is the initial wealth of the country. 1. Explain why in this three-period model it cannot be that b3 <0 and it should not be that b3 > 0. 2. Given this, use the flow budget constraints to derive the intertemporal budget con- straint: C1 C2 Y2 Co + = (1 + r)bo + yo + + 1+r (1+r)² + Y1 1+r (1+r)²¹ Interpret this equation. 3. Show that the intertemporal budget constraint is equivalent to nxi NX2 (1+r)bo+nxo + + = 0, 1+r (1+r)² where nx=yt - c. Explain why it is also equivalent to bo + cao + cai + ca₂ = 0, where carb, +nx₁ = b₁+1b₂. When is it possible to have nx < 0 for every t = 0, 1, 2 and why? Which country that we discussed might fit this description? Does it violate the logic that all trade deficits must be compensated by trade surpluses? 4. Using your favorite method, derive the intertemporal optimality conditions for t= 0, 1: u'(c) = B(1 + r)u' (C₁+1). 5. Assume bo = 0 and 3 = 1 and r = 0. Solve for consumption co, net exports não, and current account cao, by defining the concept of permanent income y. Interpret your results by providing examples for different yo and y. Discuss intuitively how the result change when bo < 0, 3 < 1, and r> 0.
Expert Answer:
Answer rating: 100% (QA)
At the period of period 3 when t 2 Using the given equation b 3 1rb 2 y 2 c 2 t 2 The world ends after period 3 and thus no one would be available to ... View the full answer
Related Book For
Introduction to Operations Research
ISBN: 978-1259162985
10th edition
Authors: Frederick S. Hillier, Gerald J. Lieberman
Posted Date:
Students also viewed these accounting questions
-
2. Consider a three period binomial time-state model in which there are two securities, a bond and a stock. The payments made by these securities in each state are shown in the trees below: 1.00...
-
Consider the intertemporal budget constraint in equation (18.5). Assume the interest rate is I = 5%. (a) Suppose the government cuts taxes today by $100 billion. Describe three possible ways the...
-
Explain why the intertemporal budget constraint pictured in Figure 14.1 can be interpreted as requiring that individuals choose C0 and C1 so that the present value of this consumption is equal to...
-
How much momentum does a car of mass 1 5 0 2 KG have a travels at a consistent speed of 1 4 . 3 m / s?
-
Jeanette Corporations president is in a dilemma regarding which inventory method (LIFO or FIFO) to use. The controller provides the following list of factors that should be considered before making a...
-
Hunter Lovins defines employee engagement as the goal of creating supportive, collaborative, and rewarding work environments. Compare her understanding of employee engagement with the principle of...
-
You have completed your review and preliminary evaluation of internal accounting controls over the purchasing, accounts payable, and cash disbursements system of Riley Corporation, which has been...
-
Austin Limited is trying to determine the value of its ending inventory as of February 28, 2014, the companys year-end. The following transactions occurred, and the accountant asked your help in...
-
Visions designs, markets, and distributes audio and gaming headphones, earbuds, and speakers. Assume that last year, Visions reported cost of goods sold of $171 million. Assume that this year, cost...
-
What is the value of CP's revised offer on December 8 (before CP "sweetened" its offer by adding the CVR security)? In your analysis, assume the following: a) A valuation date of December 31, 2015,...
-
You are given a function foo() that represents a biased coin. When foo() is called, it returns 0 with 60% probability, and 1 with 40% probability. You have to write a new function, bar(), that...
-
Lawson Consulting had the following accounts and amounts on December 31. Cash $ 8,000 Dividends $ 2,100 Accounts receivable 5,100 Services revenue 13,800 Equipment 7,100 Rent expense 2,600 Accounts...
-
Why might life insurance and retirement plans be appropriate choices for charitable gifts in the overall estate plan of a donor?
-
in year one taxpayer filed a joint return showing gross income of $45,000 and deductions of $48,000, which included state real property taxes paid on their residence in the amount of $5,000....
-
Assume that the cooperative has $1,645,371 of Net Income to allocate to patrons ($1,785,321 Net Income - $139,950 actual Unallocated Reserve contribution). Also assume that 30%, or $493,611, of this...
-
Discuss the principles and applications of process intensification techniques, such as microreactors and membrane separations, in enhancing the sustainability and efficiency of chemical processes.
-
A pareto optimal resorting of students to different colleges is Question 8 options: a solution to mismatch that ensures that on average students will be better off. a solution to mismatch that...
-
Graph one period of each function. y = 4 cos x
-
Using the approximation for finding the optimal policy for the stochastic single-period model with a setup cost when demand has an exponential distribution, find this policy when and the costs are...
-
The Seabuck and Roper Company has a large warehouse in southern California to store its inventory of goods until they are needed by the companys many furniture stores in that area. A single crew with...
-
Consider the following problem. Maximize Z = 2x1 x2 + x3, Subject to and x1 ¥ 0, x2 ¥ 0, x3 ¥ 0. If we let x4, x5, and x6 be the slack variables for the respective constraints, the...
-
How is biological anthropology today fundamentally different from its origins as physical anthropology?
-
How did the earliest biblical scholars estimate Earths age?
-
How is science different from other ways of understanding the world?
Study smarter with the SolutionInn App