(a) Which Euler Equation is the Euler Equation for money? Which is the one for capital ? How can you tell?

(b) What is steady state output?

(c) What effect will an increase in the money supply (mt ) have on steady state output?

(d) Milton Friedman discussed the possibility of setting the marginal social cost of printing one more unit of money to zero, implying that the real interest rate should be equal to the rate of deflation in the economy, but not everyone agreed with this. What reasoning did Phelps (1973) provide to argue against Friedman's rule? Which interpretation would be correct in the model? Why?

(e) Would Phelps (1973) idea be consistent with modern monetary theory (MMT)?

2. (45 points) Today is the big day! This is your first cabinet meeting with Prime Minister Osiris! He and his wife, Isis, are super excited to have you onboard with them and the rest of their administration! They need some help with handling some of the sitting senators who are interested in trying to block a vote on selecting a chair-kitten to the Chirpistani Central Bank (CCB) who is of the belief that the current Chirpistani economy has almost fully flexible prices. You decide the best way is to show them they're wrong is via a model that explains the Chirpistani economy. You provide them with the following utility U = { ** (In(c) + eln(m.)) (1) 0 where utility is a function of consumption and real money balances. The representative agent has the following constraint: 4 = Ak - 4+ke-(1+*)met + m - (1+r)-641 + (2) where the Chirpistani government can sell bonds (6-1) at an interest rate re and issue money, with an inflation rate . Capital accumulated via the law of motion of capital, and thus the Bellman Equation is the following: V(ke, be, me) = In(a) + Oln(m.) + SV (:1, bet 1. Me+1) (3) which you will use to convince the senators that it is unwise to block the nomination of the chair-kitten select of the CCB. (a) (10 points) Which Euler Equation is the Euler Equation for money? Which is the one for capital? How can you tell? 1 (1 + Wett) + 8 CE Ce+1 me1 1 1 Bla Acu101 + (1 - 8)) CE C+1 (5) 2. (45 points) Today is the big day! This is your first cabinet meeting with Prime Minister Osiris! He and his wife, Isis, are super excited to have you onboard with them and the rest of their administration! They need some help with handling some of the sitting senators who are interested in trying to block a vote on selecting a chair-kitten to the Chirpistani Central Bank (CCB) who is of the belief that the current Chirpistani economy has almost fully flexible prices. You decide the best way is to show them they're wrong is via a model that explains the Chirpistani economy. You provide them with the following utility U = { ** (In(c) + eln(m.)) (1) 0 where utility is a function of consumption and real money balances. The representative agent has the following constraint: 4 = Ak - 4+ke-(1+*)met + m - (1+r)-641 + (2) where the Chirpistani government can sell bonds (6-1) at an interest rate re and issue money, with an inflation rate . Capital accumulated via the law of motion of capital, and thus the Bellman Equation is the following: V(ke, be, me) = In(a) + Oln(m.) + SV (:1, bet 1. Me+1) (3) which you will use to convince the senators that it is unwise to block the nomination of the chair-kitten select of the CCB. (a) (10 points) Which Euler Equation is the Euler Equation for money? Which is the one for capital? How can you tell? 1 (1 + Wett) + 8 CE Ce+1 me1 1 1 Bla Acu101 + (1 - 8)) CE C+1