Questions and Answers of Modeling Monetary Economies

Consider an economy in which the money growth rate permanently increases from 3 percent to 10 percent. What is the effect of this policy change on the capital stock?
Suppose the monetary authority prints fiat money at the rate but now does not distribute the newly printed money as a lump-sum subsidy. Instead, the government distributes the newly printed money by
Consider an economy with a constant population of N = 1,000. Individuals are endowed with y = 20 units of the consumption good when young and nothing when old. All seigniorage revenue is used to
Assume that the utility function of people in the economy described in Exercise 3.6 is log (c1,t) + log (c2,t+1).a. Find the real demand for money (q = vtmt) as a function of z and τ.b. Find the
Assume that people face a lump-sum tax of T goods when old and a rate of expansion of the fiat money supply of z > 1. The tax and the expansion of the fiat money stock are used to finance
Describe the essential features of a model economy of rational people for which each of the following statements is true: (These features might include the pattern of population growth, monetary
Consider a pay-as-you-go social security plan that would collect 10 goods from each young person and distribute these goods evenly to old people. Find the effect of this plan on the wealth of future
Consider an economy in which the central bank is willing to loan any quantity of reserves to banks. Let the gross real return on capital be x.a. What amount would a bank choose to borrow if the
Consider an increase in the lump-sum taxes paid by old people. Find its effect on wealth consumption when young and old and on saving by the young. Assume that capital is the only asset in the
Suppose people live three-period lives. If the government cuts taxes on the middle-aged, what will happen to the consumption and saving of the young? To the consumption and saving of the middle-aged?
Consider an overlapping generations economy in which endowments increase over time. Let yt = αyt-1, where α> 1 Endowments are received by young people while old people receive no endowment.
Suppose the government debt of 100 goods in period financed not the tax cut of Example 17.1 but a government capital project that will pay off 100 rg goods in the following period (t + 1). At
Consider an economy of altruistic two-period-lived people who care about the utility of their children. Children do not care about the utility of their parents. Parents currently leave a bequest
Consider an economy of identical infinitely lived people. Suppose there is a tax cut in period 1 of d goods per person financed by long-term government debt that is never retired but pays the net
Explain why a government that must run up a large national debt to finance extraordinary spending over the next several years might choose to surrender the power of money creation to a central bank
What will happen to the demand for fiat money, the nominal interest rate, and the real interest rate if the government tries to use inflation to default on the national debt every other year? In
Suppose the government must borrow 1,000 goods in period 1. Let the gross real marginal product of capital equal 1.07. Assume that people always want to hold fiat money balances worth a total of 100
Consider an economy in which aggregate real money balances is always equal to 1,000,000 goods. What is the maximum amount of seigniorage that a government could generate in this economy in a single
Consider an economy in which aggregate real money balances is equal to 1,000,000 goods when the money stock is constant. However, the aggregate demand for real money balances is represented by Nq =
For a stationary economy, suppose the gross real interest rate on government bonds is equal to the population growth rate; that is, r = n. Assume that the government purchases 1,000 goods per young
Suppose the economy starts with zero outstanding government bonds. Let government expenditures be goods per young person each period. Neither taxes nor seigniorage are used in periods 1 and 2. So the
Consider an overlapping generations economy in which capital pays a 25 percent net rate of return. The population of a generation grows by 10 percent each period. In the initial period (period 1),
Suppose there are 100 young rich people born in every period. Government debt and capital both pay real net rates of return equal to 25 percent. The fiat money stock is fixed. Each young rich person
Assume that the maximum revenue that can be collected from all taxes, including seigniorage, is 5,000 goods and that the maximum debt is 6,000 goods. The real gross market rate of return is 1.2.
Use the same model economy as described in 14.3.Data from 14.3Consider a model economy in which each young person receives 200 units of the consumption good. There are 50 young people born each
Consider a model economy in which each young person receives 200 units of the consumption good. There are 50 young people born each period. The total stock of fiat money is constant and equal to
In that simple random-relocation model, each person is endowed with 50 goods when young and nothing when old. The money stock is constant and equal to $1,000,000. Each island has a constant
Consider the random-relocation economy developed in this chapter. Each person receives an endowment of 500 goods when young and nothing when old. People only want to consume when old. Let Mt =
Consider an economy in which each person is endowed with 1,000 goods when young and nothing when old. When young, each person wants to consume 600 goods. The central bank pays interest on reserves
In each of the following instances, an exogenous change is described. Use a graph to show how the particular exogenous change can result in an increase in the equilibrium return on deposits.a. A
Suppose the central bank sets the reserve requirement ratio at 5 percent. The maximum the central bank is willing to lend is 25 percent of required reserves, charging the gross real return of 1 on
Consider an economy in which the reserve requirement is increased from 10 percent to 20 percent.a. Explain why the increase in the reserve requirement ratio causes welfare to
Answer each part of Exercise 9.1 assuming that the central bank allows banks to borrow up to one-half of required reserves at a net interest rate of 8 percent.Data from Exercise 9.1Consider an
Consider an economy with a constant population in which people wish to hold bank checking deposits worth a total of 5,000 goods in every period. The economy has a total endowment of 10,000 goods in
Suppose the inter mediation of capital goods costs ϕ units of the consumption good for each unit of capital intermediated (ϕ < X0.5). Assume that transaction costs occur when agents withdraw
Consider our model of three-period-lived individuals of this chapter. Suppose the two-period real rate of return on capital is X = 1.44, the rate of population growth is n = 1.1, and the rate of fiat
Use the graph in Figure 7.9 to answer the following questions: a. Suppose the government restricts total borrowing to an amount less than L̅. What would the effect be on capital holdings?b. Find
Suppose people in our overlapping generations model have the opportunity either to hold fiat money with complete safety or to lend to someone who may never repay the loan. The chance of such a
Suppose a version of the model economy in which the money growth rate is a random variable. Let the probability be 4/5 that zt = 1 and the probability be 1/5 that zt = 2. The realization of monetary
Consider the following version of the model of this chapter. The number of young people born on island i in period , t, Nit is random according to the following specification:Nit = 4/5 N with
Suppose there are two islands. The total population on the two islands is 500 people. The initial stock of fiat money is $500. The money stock increases according to Mt = 1.1Mt-1. The probability
Consider a standard overlapping generations economy in which Euroland is the name given to area over which the euro is the regional currency. Suppose the population of Euroland is 1,000 people born
Consider two identical countries in our standard overlapping generations model. In each country, the population of every generation is 100 and each young person wants money balances worth 18 goods.
Consider a two-country economy with no currency restrictions.a. Write down the money market-clearing condition.b. Discuss the exchange rate in this economy. In particular, discuss why the exchange
Consider two identical countries, α and b, in our standard overlapping generations model. In each country the population of every generation is 200 and each young person wants money balances worth
Consider two identical countries in our standard overlapping generations model. In each country, the population of every generation is 100 and each young person wants money balances worth 10 goods.
Suppose that Japan (country α) and China (country b) do not have foreign currency controls in effect. The total demand for money is always 2,000 goods in Japan and 1,000 goods in China. The fiat
Consider the following economy: Individuals are endowed with y units of the consumption good when young and nothing when old. The fiat money stock is constant. The population grows at rate n. In each
Consider an overlapping generations mode with the following characteristics: Each generation is composed of 1,000 individuals. The fiat money supply changes according to Mt = 2Mt-1. The initial
Consider an economy with a shrinking stock of fiat money. Let Nt = N, a constant, and Mt = zMt-1 for every period t, where z is positive and less than 1. The government taxes each old
Let Nt = nNt-1 and Mt = zMt-1 for every period t, where z and n are both greater than 1. The money created each period is used to finance a lump-sum subsidy a*t of goods to each young
Consider again the model economy described in Exercise 3.2, but suppose there is a second storable good, silver. Silver is as easy to exchange and store as gold. The initial old own a total of 50
Suppose the consumption of gold offers people a marginal utility that diminishes as that person consumes more gold. Assume also that gold can be mined in unlimited amounts at the constant marginal
Consider a fiat money/barter system like that portrayed in this chapter. Suppose the number of goods J is 4. Each search for a trading partner costs a person 3 units of utility. In addition, suppose
Consider a commodity money model economy like the one described in this chapter but with the following features: There are 100 identical people in every generation. Each person is endowed with 10
Consider a fiat money/barter system like that portrayed in this chapter. Suppose the number of goods J is 100. Each search for a trading partner costs a person 2 units of utility.a. What is the
Suppose that population increases at a fixed rate n. For this model economy, verify that the horizontal intercept of the feasible set line is equal to y and that the vertical intercept of the
In this chapter, we modeled growth in an economy by a growing population. We could also achieve a growing economy by having an endowment that increases over time. To see this, consider the following
Suppose utility equals In (c1,t) + β In (c2, t+1)where In (c)represents the natural logarithm of c, whose derivative equals 1/c. The parameter β is a positive number.a. Prove that real money
In each of the four cases, please tell me the unit of measure, or in the case of a price, the rate at which two goods are traded for one another (in other words, describe both the numerator and the
Consider an economy with a growing population in which each person is endowed with y1when young and y2 when old. Assume that y2 is sufficiently small that everyone wants to consume more
Consider two economies, A and B. Both economies have the same population, supply of fiat money, and endowments. In each economy, the number of young people born in each period is constant at N, and
Suppose capital is risky and pays gross real rates of return of 1.2, 1.1, and 0.9 with probabilities .1, .7, and .2, respectively. A risk-free asset pays a safe gross real rate of return of 1.04.
Consider an overlapping generations model with 200 lenders and 100 borrowers born in every period. Everyone lives for only two periods. Each lender is endowed with 20 goods when young and nothing
Consider an economy of three-period-lived people in overlapping generations. Each person is endowed with y goods when young and old and nothing when middle-aged. The population of each generation
Consider an economy with a constant population in which each person is endowed with y1 when young and y2 when old. Assume that y2 is sufficiently small so that everyone wants to consume
Consider an economy in which the population follows the rule Nt = 1.1 Nt-1. In addition, suppose that endowments per young person grow each period according to yt = 1.05yt-1. Assume old
Consider two economies, labelled A and B. In each one, let every two period-lived person be endowed with 20 units of the consumption when young and nothing when old. In Economy A, each young person
Suppose a person has constant marginal utility over both goods instead of diminishing marginal utility for consumption when young and consumption when old. a. Draw an indifference curve for
Consider an economy with a constant population of N = 100. Each person is endowed with y = 20 units of the consumption good when young and nothing when old.a. What is the equation for the feasible
Consider an economy in which there are 100 workers. One-half of the workers are endowed with 200 units of the consumption good when young and nothing when old. The remaining workers are endowed with
Consider an economy in which people wish to hold bank checking deposits worth a total of 5 million goods and currency worth 2 million goods in every period. In addition, there is a stock of
Consider an economy in which there are 1,000 workers. One-half of the workers are endowed with 50 units of the consumption good when young and nothing when old. The remaining workers are endowed with
Consider an economy in which there are 200 workers. Three-fourths of the workers are endowed with 100 units of the consumption good when young and nothing when old. The remaining workers are endowed
Consider an economy in which people wish to hold money balances worth a total of 5,000,000 goods. They are indifferent between money issued by the central bank and money issued by private banks (so
Consider an economy in which people wish to hold money balances worth a total of 4,000 goods. They are indifferent between money issued by the central bank and money issued by private banks (so long
People in an economy want to hold money balances worth 500 goods. If both central bank, or fiat, money and deposits at a bank pay the same return, people are indifferent between it and bank deposits.
Suppose Canada backs Canadian dollars with U.S. dollars. Canada issues million Canadian dollars to purchase $5 million worth U.S. Treasury bonds. Use Equation 10.28 to compute the implied exchange
Suppose the old bankers on the central island own $5,000,000 of fiat money and creditors are owed $7,500,000.a. Compute the price at which creditors be able to sell the debt they own.b. How much
Consider a version of the model economy presented in this chapter with fiat and private money. Assume that population is constant with 400 people born each period. Each young person is endowed with
Consider an economy in which there is a morning period and an afternoon period. There are 100 debtors and 100 creditors born each period. When old, one of the debtors arrives in the morning. Before
Suppose there are 200 young people born each period. Each young person receives 200 goods, but nothing when middle-aged or when old. There is a storage technology. For each good put into storage in
Suppose there are 100 young people born each period. Each young person receives 250 goods, but nothing when middle-aged or when old. People can access a storage technology that yields one good next
Use the same data as put forward in problem 13.3.Problem 13.3Suppose there are 100 young people born each period. Each young person receives 250 goods, but nothing when middle-aged or when old.
Suppose you are the sole shareholder of a bank with deposits of $1,200,000 and assets of $1,000,000. There is no reserve requirement. Your liability in the bank is limited by law to your investment
Consider an economy with a large number of potential online game providers. The provider lacks the funds to start their projects. There is an equal number of investors who have the funds but no
Consider an economy in which people live two-period lives in overlapping generations but are endowed only in the first period of life. Capital has a minimum size, k*, which is greater than the
Consider an economy with a large number of potential online game providers. The provider lacks the funds to start their projects. There is an equal number of investors who have the funds but no
Suppose a person faces the following two bundles: Bundle A, which consists of 6 units of the consumption good when a person is young and 12 units of the consumption good when a person is old (c1 = 6