Advanced Macroeconomics 4th Edition David Romer - Solutions

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Exercise 1. GOP per capita versus GOP per worker Give some arguments why GOP per worker, rather than GOP per capita, should be used for a comparison of standards of living between countries.
Exercise 5. Menu costs and real and nominal rigidities Explain and discuss the type of costs included in the concept of 'menu costs'. Explain why and in what sense so-called real rigidities are necessary to generate nominal wage and price rigidity.
Exercise 3. Macroeconomic policies for the short run and for the long run Explain the difference between structural policies and demand management policies. Explain the concepts of 'nominal rigidities', 'real rigidities', and the 'natural rate of resource utilization'.Try to give concrete examples
Exercise 2. Short-run versus long-run macroeconomics Explain the different assumptions underlying macroeconomics for the short run and macroeconomics for the long run. Do you find these assumptions reasonable? Justify your answers.
Exercise 1. Aggregation in macroeconomics Discuss why macroeconomists typically work with aggregate variables and explain the arguments they use to defend this procedure. Do you find the arguments reasonable? Justify your answers.
11.22. (Cagan, 1956.) Suppose that instead of adjusting their real money holdings gradually toward the desired level, individuals adjust their expectation of inflation gradually toward actual inflation. Thus equations (11.70) and (11.71)are replaced by m(t) = Cexp(−bπe(t)) and π˙e(t) =
11.21. Growth and seignorage, and an alternative explanation of the inflationgrowth relationship. (Friedman, 1971.) Suppose that money demand is given by ln (M/P) = a − bi + ln Y, and that Y is growing at rate gY. What rate of inflation leads to the highest path of seignorage?
11.20. Rational political business cycles. (Alesina and Sachs, 1988.) Suppose the relationship between output and inflation is given by yt = y +b(πt − Et −1πt), where b > 0 and where Et −1 denotes the expectation as of period t − 1. Suppose there are two types of politicians,
11.18. Consider the situation analyzed in Problem 11.16, but assume that there is only some finite number of periods rather than an infinite number. What is the unique equilibrium? (Hint: Reason backward from the last period.)11.19. The political business cycle. (Nordhaus, 1975.) Suppose the
11.17. Other equilibria in the Barro–Gordon model. Consider the situation described in Problem 11.16. Find the parameter values (if any) for which each of the following is an equilibrium:(a) One-period punishment. πe t equals ˆπ if πt−1 = πe t −1 and equals b/a otherwise; π = πˆ each
11.16. Solving the dynamic-inconsistency problem through punishment. (Barro and Gordon, 1983.) Consider a policymaker whose objective function is∞t=0 βt(yt − aπ2 t /2), where a > 0 and 0 < β < 1. yt is determined by the Lucas supply curve, (11.53), each period. Expected inflation is
11.15. In the model of delegation analyzed in Section 11.7, suppose that the policymaker’s preferences are believed to be described by (11.59), with a > a, when πe is determined. Is social welfare higher if these are actually the policymaker’s preferences, or if the policymaker’s
11.14. The tradeoff between low average inflation and flexibility in response to shocks with delegation of control over monetary policy. (Rogoff, 1985.)Suppose that output is given by y = y n + b(π − πe), and that the social welfare function is γ y − aπ2/2, where γ is a random variable
11.13. A model of reputation and monetary policy. (This follows Backus and Driffill, 1985, and Barro, 1986.) Suppose a policymaker is in office for two periods. Output is given by (11.53) each period. There are two possible types of policymaker, type 1 and type 2. A type-1 policymaker, which occurs
11.12. (Fischer and Summers, 1989.) Suppose inflation is determined as in Section 11.7. Suppose the government is able to reduce the costs of inflation;that is, suppose it reduces the parameter a in equation (11.54). Is society made better or worse off by this change? Explain intuitively.
11.11. The importance of using rather than saving your ammunition in the presence of the zero lower bound. Suppose inflation is described by the accelerationist Phillips curve, ˙π(t) = λy(t),λ > 0, and that output is determined by a simple IS curve, y(t) = −b[i(t) − π(t)], b > 0,
11.10. Uncertainty and policy. (Brainard, 1967.) Suppose output is given by y =x + (k + εk)z + u, where z is some policy instrument controlled by the government and k is the expected value of the multiplier for that instrument.εk and u are independent, mean-zero disturbances that are unknown when
11.9. Money versus interest-rate targeting. (Poole, 1970.) Suppose the economy is described by linear IS and money-market equilibrium equations that are subject to disturbances: y = c− ai + ε1, m − p = hy − ki + ε2, where ε1 andε2 are independent, mean-zero shocks with variances σ2 1 and
11.8. Consider the system given by (11.41).(a) What does the system simplify to when φπ = 1? What are the eigenvalues of the system in this case? Suppose we look for self-fulfilling movements in ˜y and π of the form πt = λtZ, ˜yt = cλtZ, |λ| ≤ 1. When φπ = 1, for what values of λ and
11.7. Consider the model of Section 11.4. Suppose, however, the aggregate supply equation, (11.16), is πt = πt−1 +α(yt−1 − y n t−1)+επt , where επ is a white-noise shock that is independent of εI S and εY. How, if at all, does this change to the model change expression (11.27) for
11.6. Regime changes and the term structure of interest rates. (See Mankiw and Miron, 1986.) Consider an economy where money is neutral. Specifically, assume that πt = mt and that r is constant at zero. Suppose that the money supply is given by mt = k mt −1 + εt, where ε is a white-noise
11.5. Policy rules, rational expectations, and regime changes. (See Lucas, 1976, and Sargent, 1983.) Suppose that aggregate supply is given by the Lucas supply curve, yt = y + b(πt − πe t ), b > 0, and suppose that monetary policy
11.4. Suppose you want to test the hypothesis that the real interest rate is constant, so that all changes in the nominal interest rate reflect changes in expected inflation. Thus your hypothesis is it = r + Etπt +1.(a) Consider a regression of it on a constant and πt +1. Does the hypothesis that
11.3. Assume, as in Problem 11.2, that prices are completely unresponsive to unanticipated monetary shocks for one period and completely flexible thereafter.Assume also that y = c − ar and m − p = b + hy − ki hold each period. Suppose, however, that the money supply follows a random walk: mt
11.2. Consider a discrete-time model where prices are completely unresponsive to unanticipated monetary shocks for one period and completely flexible thereafter. Suppose the IS equation is y = c − ar and that the condition for equilibrium in the money market is m − p = b + hy − ki. Here y, m,
11.1. Consider a discrete-time version of the analysis of money growth, inflation, and real balances in Section 11.1. Suppose that money demand is given by mt − pt = c − b(Et pt +1 − pt), where m and p are the logs of the money stock and the price level, and where we are implicitly assuming
10.17. The efficiency of the decentralized equilibrium in a search economy. Consider the steady state of the model of Section 10.6. Let the discount rate, r, approach zero, and assume that the firms are owned by the households;thus welfare can be measured as the sum of utility and profits per unit
10.16. Consider the static search and matching model analyzed in equations(10.71)–(10.75). Suppose, however, that the matching function, M(•), is not assumed to be Cobb–Douglas or to have constant returns. Is the condition for the decentralized equilibrium to be efficient still that the
10.15. Consider the model of Section 10.6.(a) Use equations (10.65) and (10.69), together with the fact that VV = 0 in equilibrium, to find an expression for E as a function of the wage and exogenous parameters of the model.(b) Show that the impact of a rise in y on E is greater if w remains fixed
10.14. Consider the model of Section 10.6. Suppose the economy is initially in equilibrium, and that y then falls permanently. Suppose, however, that entry and exit are ruled out; thus the total number of jobs, F + V, remains constant.How do unemployment and vacancies behave over time in response
10.13. Consider the steady state of the Mortensen-Pissarides model of Section 10.6.(a) Suppose that φ = 0. What is the wage? What does the equilibrium condition (10.70) simplify to?
10.12. Describe how each of the following affects steady-state employment in the Mortensen–Pissarides model of Section 10.6:(a) An increase in the job breakup rate, λ.(b) An increase in the interest rate, r.(c) An increase in the effectiveness of matching, k.(d) An increase in income when
10.11. In the setup described in Problem 10.10, suppose that w is distributed uniformly on [μ − a,μ + a] and that C < μ.(a) Find V in terms of μ,a, and C.(b) How does an increase in a affect V ? Explain intuitively.
10.10. Partial-equilibrium search. Consider a worker searching for a job. Wages, w, have a probability density function across jobs, f (w), that is known to the worker; let F (w) be the associated cumulative distribution function. Each time the worker samples a job from this distribution, he or she
10.9. The Harris–Todaro model. (Harris and Todaro, 1970.) Suppose there are two sectors. Jobs in the primary sector pay wp; jobs in the secondary sector pay ws. Each worker decides which sector to be in. All workers who choose the secondary sector obtain a job. But there are a fixed number, Np ,
10.8. An insider-outsider model. Consider the following variant of the model in equations (10.39)–(10.42). The firm’s profits are π = A F (LI + LO) − wI LI −wO LO, where LI and LO are the numbers of insiders and outsiders the firm hires, and wI and wO are their wages. LI always equals LI ,
10.7. Implicit contracts under asymmetric information. (Azariadis and Stiglitz, 1983.) Consider the model of Section 10.5. Suppose, however, that only the firm observes A. In addition, suppose there are only two possible values of A, AB and AG (AB < AG), each occurring with probability 1 2 .We can
10.6. Implicit contracts without variable hours. Suppose that each worker must either work a fixed number of hours or be unemployed. Let C E i denote the consumption of employed workers in state i and C U i the consumption of unemployed workers. The firm’s profits in state i are therefore Ai F
10.5. The fair wage-effort hypothesis. (Akerlof and Yellen, 1990.) Suppose there are a large number of firms, N, each with profits given by F (eL)−wL, F(•) > 0, F (•) < 0. L is the number of workers the firm hires, w is the wage it pays, and e is workers’ effort. Effort is given by e =
10.4. Suppose that in the Shapiro–Stiglitz model, unemployed workers are hired according to how long they have been unemployed rather than at random;specifically, suppose that workers who have been unemployed the longest are hired first.(a) Consider a steady state where there is no shirking.
10.3. Describe how each of the following affect equilibrium employment and the wage in the Shapiro–Stiglitz model:(a) An increase in workers’ discount rate, ρ.(b) An increase in the job breakup rate, b.
10.2. Efficiency wages and bargaining. (Garino and Martin, 2000.) Summers (1988, p. 386) states, “In an efficiency wage environment, firms that are forced to pay their workers premium wages suffer only second-order losses. In almost any plausible bargaining framework, this makes it easier for
10.1. Union wage premiums and efficiency wages. (Summers, 1988.) Consider the efficiency-wage model analyzed in equations (10.12)–(10.17). Suppose, however, that fraction f of workers belong to unions that are able to obtain a wage that exceeds the nonunion wage by proportion μ. Thus, wu = (1 +
9.14. The Modigliani–Miller theorem. (Modigliani and Miller, 1958.) Consider the analysis of the effects of uncertainty about discount factors in Section 9.7.Suppose, however, that the firm finances its investment using a mix of equity and risk-free debt. Specifically, consider the financing of
9.13. (This follows Bernanke, 1983a, and Dixit and Pindyck, 1994.) Consider a firm that is contemplating undertaking an investment with a cost of I. There are two periods. The investment will pay off π1 in period 1 and π2 in period 2.
9.12. Consider the model of investment with kinked adjustment costs in Section 9.8.Describe the effect of each of the following on the q˙ = 0 locus, on the area where K˙ = 0, on q and K at the time of the change, and on their behavior over time. In each case, assume q and K are initially at Point
9.11. Consider the model of investment under uncertainty with a constant interest rate in Section 9.7. Suppose that, as in Problem 9.10, π (K) = a − bK and that C (I ) = αI 2/2. In addition, suppose that what is uncertain is future values ofa. This problem asks you to show that it is an
9.10. Suppose that π (K) = a − bK and C (I ) = αI 2/2.(a) What is the q˙= 0 locus? What is the long-run equilibrium value of K?(b) What is the slope of the saddle path? (Hint: Use the approach in Section 2.6.)
9.9. Suppose that the costs of adjustment exhibit constant returns in κ˙ and κ.Specifically, suppose they are given by C (κ˙/κ)κ, where C (0) = 0, C(0) = 0, C (•) > 0. In addition, suppose capital depreciates at rate δ; thus κ˙(t) =I (t) − δκ(t). Consider the representative firm’s
9.8. A model of the housing market. (Poterba, 1984.) Let H denote the stock of housing, I the rate of investment, pH the real price of housing, and R the rent.Assume that I is increasing in pH, so that I = I (pH), with I(•) > 0, and that H˙ = I −δH. Assume also that the rent is a decreasing
9.7. Consider the model of investment in Sections 9.2–9.5. Suppose it becomes known at some date that there will be a one-time capital levy. Specifically, capital holders will be taxed an amount equal to fraction f of the value of their capital holdings at some time in the future, time T. Assume
9.6. Consider the model of investment in Sections 9.2–9.5. Describe the effects of each of the following changes on the K˙ = 0 and q˙ = 0 loci, on K and q at the time of the change, and on their behavior over time. In each case, assume that K and q are initially at their long-run equilibrium
9.5. Using the calculus of variations to find the socially optimal allocation in the Romer model. Consider the Romer model of Section 3.5. For simplicity, neglect the constraint that LA cannot be negative. Set up the problem of choosing the path of LA (t) to maximize the lifetime utility of the
9.4. Using the calculus of variations to solve the social planner’s problem in the Ramsey model. Consider the social planner’s problem that we analyzed in Section 2.4: the planner wants to maximize ∫∞t =0 e−βt[c (t)1−θ/(1 − θ)]dt subject to k˙(t) = f (k (t)) − c (t) − (n + g)k
9.3. The major feature of the tax code that affects the user cost of capital in the case of owner-occupied housing in the United States is that nominal interest payments are tax-deductible. Thus the after-tax real interest rate relevant to home ownership is r − τi, where r is the pretax real
9.2. Corporations in the United States are allowed to subtract depreciation allowances from their taxable income. The depreciation allowances are based on the purchase price of the capital; a corporation that buys a new capital good at time t can deduct fraction D(s ) of the purchase price from its
9.1. Consider a firm that produces output using a Cobb–Douglas combination of capital and labor: Y = KαL1−α, 0 < α < 1. Suppose that the firm’s price is fixed in the short run; thus it takes both the price of its product, P, and the quantity, Y, as given. Input markets are competitive;
8.15. Time-inconsistent preferences. Consider an individual who lives for three periods. In period 1, his or her objective function is ln c1 + δln c2 + δln c3, where 0 < δ < 1. In period 2, it is ln c2 + δln c3. (Since the individual’s period3 choice problem is trivial, the period-3 objective
8.14. Precautionary saving with constant-absolute-risk-aversion utility. Consider an individual who lives for two periods and has constant-absoluterisk-aversion utility, U = −e−γ C1 − e−γ C2 , γ > 0. The interest rate is zero and the individual has no initial wealth, so the
8.13. Habit formation and serial correlation in consumption growth. Supposethat the utility of the representative consumer, individual i, is given by T t=1[1/(1 + ρ)t](Cit/Zit)1−θ/(1 − θ), ρ > 0, θ > 0, where Zit is the “reference”level of consumption. Assume the interest rate is
8.12. Consumption of durable goods. (Mankiw, 1982.) Suppose that, as in Section 8.2, the instantaneous utility function is quadratic and the interest rate and the discount rate are zero. Suppose, however, that goods are durable;specifically, Ct = (1 − δ)Ct −1 + Xt, where Xt is purchases in
8.11. The equity premium and the concentration of aggregate shocks. (Mankiw, 1986.) Consider an economy with two possible states, each of which occurs with probability 1 2 . In the good state, each individual’s consumption is 1.In the bad state, fraction λ of the population consumes 1 −
8.10. The Lucas asset-pricing model. (Lucas, 1978.) Suppose the only assets in the economy are infinitely lived trees. Output equals the fruit of the trees, which is exogenous and cannot be stored; thus Ct = Yt, where Yt is the exogenously determined output per person and Ct is consumption per
8.9. Bubbles. Consider the setup of the previous problem without the assumption that lims→∞ Et [Pt +s/(1 + r)s ] = 0.(a) Deterministic bubbles. Suppose that Pt equals the expression derived in part (b) of Problem 8.8 plus (1 + r)tb, b > 0.(i) Is consumers’ first-order condition derived in
8.8. Consider a stock that pays dividends of Dt in period t and whose price in period t is Pt. Assume that consumers are risk-neutral and have a discount rate of r ;thus they maximize E [∞t =0 Ct/(1 + r )t ].(a) Show that equilibrium requires Pt = Et [(Dt +1 + Pt +1)/(1 + r )] (assume that if the
8.7. Consider the two-period setup analyzed in Section 8.4. Suppose that the government initially raises revenue only by taxing interest income. Thus the individual’s budget constraint is C1 + C2/[1 + (1 − τ)r] ≤ Y1 + Y2/[1 + (1 − τ)r], where τ is the tax rate. The government’s revenue
8.6. A framework for investigating excess smoothness. Suppose that Ct equals[r/(1 + r)]{At + ∞s =0 Et [Yt +s]/(1 + r)s}, and that At +1 = (1 + r )(At + Yt − Ct).(a) Show that these assumptions imply that Et [Ct +1] = Ct (and thus that consumption follows a random walk) and that ∞s=0 Et [Ct
8.5. (This follows Hansen and Singleton, 1983.) Suppose instantaneous utility is of the constant-relative-risk-aversion form, u(Ct) = C1−θ t /(1 − θ), θ > 0. Assume that the real interest rate, r, is constant but not necessarily equal to the discount rate, ρ.(a) Find the Euler equation
8.4. In the model of Section 8.2, uncertainty about future income does not affect consumption. Does this mean that the uncertainty does not affect expected lifetime utility?
8.3. The time-averaging problem. (Working, 1960.) Actual data give not consumption at a point in time, but average consumption over an extended period, such as a quarter. This problem asks you to examine the effects of this fact.Suppose that consumption follows a random walk: Ct = Ct −1 + et,
8.2. The average income of farmers is less than the average income of nonfarmers, but fluctuates more from year to year. Given this, how does the permanent-income hypothesis predict that estimated consumption functions for farmers and nonfarmers differ?
8.1. Life-cycle saving. (Modigliani and Brumberg, 1954.) Consider an individual who lives from 0 to T, and whose lifetime utility is given by U = T t =0 u(C(t))dt, where u(•) > 0, u(•) < 0. The individual’s income is Y0 + gt for 0 ≤ t < R, and 0 for R ≤ t ≤ T. The retirement age, R,
7.12. Consider the model of Section 7.8. Suppose, however, that monetary policy responds to current inflation and output: rt = φππt + φy yt + uMP t .(a) For the case of white-noise disturbances, find expressions analogous to(7.92)–(7.94). What are the effects of an unfavorable inflation shock
7.11. Consider a continuous-time version of the Mankiw–Reis model. Opportunities to review pricing policies follow a Poisson process with arrival rate α > 0.Thus the probability that a price path set at time t is still being followed at time t+i is e−αi. The other assumptions of the model are
7.10. The new Keynesian Phillips curve with partial indexation. Consider the analysis of the new Keynesian Phillips curve with indexation in Section 7.7.Suppose, however, that the indexation is only partial. That is, if a firm does not have an opportunity to review its price in period t, its price
7.9. Consider the new Keynesian Phillips curve with indexation, equation (7.76), under the assumptions of perfect foresight and β = 1, together with our usual aggregate demand equation, yt = mt − pt.(a) Express pt+1 in terms of its lagged values and mt.(b) Consider an anticipated, permanent,
7.8. (This follows Ball, 1994a.) Consider a continuous-time version of the Taylor model, so that p (t) = (1/T)Tτ=0 x (t − τ)dτ, where T is the interval between each individual’s price changes and x (t−τ) is the price set by individuals who set their prices at time t − τ. Assume that φ
7.7. State-dependent pricing with both positive and negative inflation. (Caplin and Leahy, 1991.) Consider an economy like that of the Caplin–Spulber model.Suppose, however, that m can either rise or fall, and that firms therefore follow a simple two-sided Ss policy: if pi − p∗i (t) reaches
7.6. Consider the experiment described at the beginning of Section 7.4. Specifically, a Calvo economy is initially in long-run equilibrium with all prices equal to m, which we normalize to zero. In period 1, there is a one-time, permanent increase in m to m1.Let us conjecture that the behavior of
7.5. Repeat Problem 7.4 using lag operators.
7.4. Consider the Taylor model with the money stock white noise rather than a random walk; that is, mt = εt, where εt is serially uncorrelated. Solve the model using the method of undetermined coefficients. (Hint: In the equation analogous to (7.33), is it still reasonable to impose λ + ν = 1?)
7.3. Synchronized price-setting. Consider the Taylor model. Suppose, however, that every other period all the firms set their prices for that period and the next. That is, in period t prices are set for t and t + 1; in t + 1, no prices are set; in t +2, prices are set for t +2 and t +3; and so on.
7.2. The instability of staggered price-setting. Suppose the economy is described as in Problem 7.1, and assume for simplicity that m is a random walk(so mt = mt−1+ut, where u is white noise and has a constant variance). Assume the profits a firm loses over two periods relative to always having
7.1. The Fischer model with unbalanced price-setting. Suppose the economy is described by the model of Section 7.2, except that instead of half of firms setting their prices each period, fraction f set their prices in odd periods and fraction 1 − f set their prices in even periods. Thus the price
6.16. Consider an economy consisting of some firms with flexible prices and some with rigid prices. Let pf denote the price set by a representative flexible-price firm and pr the price set by a representative rigid-price firm. Flexible-price firms set their prices after m is known; rigid-price
6.15. Observational equivalence. (Sargent, 1976.) Suppose that the money supply is determined by mt = c zt −1 + et, where c and z are vectors and et is an i.i.d.disturbance uncorrelated with zt −1. et is unpredictable and unobservable.Thus the expected component of mt is c zt −1, and the
6.13. Thick-market effects and coordination failure. (This follows Diamond, 1982.)33 Consider an island consisting of N people and many palm trees.Each person is in one of two states, not carrying a coconut and looking for palm trees (state P) or carrying a coconut and looking for other people with
6.12. Indexation. (This problem follows Ball, 1988.) Suppose production at firm i is given by Yi = SLαi , where S is a supply shock and 0 < α ≤ 1. Thus in logs, yi = s + αi . Prices are flexible; thus (setting the constant term to 0 for simplicity), pi = wi + (1 − α)i − s. Aggregating
6.11. Consider an economy consisting of many imperfectly competitive, pricesetting firms. The profits of the representative firm, firm i, depend on aggregate output, y, and the firm’s real price, ri : πi = π(y,ri), where π22 < 0(subscripts denote partial derivatives). Let r ∗(y) denote the
6.10. Multiple equilibria with menu costs. (Ball and D. Romer, 1991.) Consider an economy consisting of many imperfectly competitive firms. The profits that a firm loses relative to what it obtains with pi = p∗ are K(pi − p∗)2, K > 0. As usual, p∗ = p +φy and y = m − p. Each firm faces a
6.9. (a) Consider the model in equations (6.27)–(6.30). Solve the model using the method of undetermined coefficients. That is, conjecture that the solution takes the form yt = AuIS t , and find the value that A must take for the equations of the model to hold. (Hint: The fact that yt = AuIS t
6.8. Consider the model in equations (6.27)–(6.30). Suppose, however, that there are shocks to the MP equation but not to the IS equation. Thus rt = byt +uMP t , uMP t = ρMPuMP t + eMP t (where −1 < ρMP < 1 and eMP is white noise), and yt = Etyt+1 − 1θrt. Find the expression analogous to
6.7. The liquidity trap. Consider the following model. The dynamics of inflation are given by the continuous-time version of (6.22)–(6.23): π˙(t) = λ[y(t)−y (t)],λ > 0. The IS curve takes the traditional form, y(t) = −[i(t)−π(t)]/θ, θ > 0. The central bank sets the interest rate
6.6. The central bank’s ability to control the real interest rate. Suppose the economy is described by two equations. The first is the IS equation, which for simplicity we assume takes the traditional form, Yt = −rt/θ. The second is the money-market equilibrium condition, which we can write as
6.5. Productivity growth, the Phillips curve, and the natural rate. (Braun, 1984, and Ball and Moffitt, 2001.) Let gt be growth of output per worker in period t, πt inflation, and π W t wage inflation. Suppose that initially g is constant and equal to gL and that unemployment is at the level that
6.4. The analysis of Case 1 in Section 6.2 assumes that employment is determined by labor demand. Under perfect competition, however, employment at a given real wage will equal the minimum of demand and supply; this is known as the short-side rule. Draw diagrams showing the situation in the labor
6.3. The multiplier-accelerator. (Samuelson, 1939.) Consider the following model of income determination. (1) Consumption depends on the previous period’s
6.2. The Baumol-Tobin model. (Baumol, 1952; Tobin, 1956.) Consider a consumer with a steady flow of real purchases of amount αY, 0 < α ≤ 1, that are made with money. The consumer chooses how often to convert bonds, which pay a constant interest rate of i, into money, which pays no interest. If
6.1. Describe how, if at all, each of the following developments affect the curves in Figure 6.1:(a) The coefficient of relative risk aversion, θ, rises.(b) The curvature of (•), ν falls.(c) We modify the utility function, (6.2), to be βt[U(Ct) + B(Mt/Pt) −V(Lt)], B > 0, and B falls.
5.16. Redo the regression reported in equation (5.55):(a) Incorporating more recent data.(b) Incorporating more recent data, and using M1 rather than M2.(c) Including eight lags of the change in log money rather than four.

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Advanced Macroeconomics 4th Edition David Romer - Solutions

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