Consider a two-period portfolio choice (between bonds and money) model. Suppose that households should pay taxes...

 

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Consider a two-period portfolio choice (between bonds and money) model. Suppose that households should pay taxes (a proportional tax denoted by t) when they have interest income (IB). The amount of taxes will be tiB where i is the nominal interest rate, and B is nominal bond holding. Assume that households have real endowment y, in Period 1 and y, in Period 2. Write down the budget constraint in Period 1 in nominal and real terms. b. Write down the budget constraint in Period 2 in nominal and real terms. Suppose that a household's utility, U = log c₁ + plog m₂ + Blog C₂, where m₁ is a real money balance (or real money holding). Find the optimality condition for real money holding and current consumption. Interpret it. d. Assume that C₁ = y, where y is real income or GDP. Derive a money demand function and velocity. Consider a two-period portfolio choice (between bonds and money) model. Suppose that households should pay taxes (a proportional tax denoted by t) when they have interest income (IB). The amount of taxes will be tiB where i is the nominal interest rate, and B is nominal bond holding. Assume that households have real endowment y, in Period 1 and y, in Period 2. Write down the budget constraint in Period 1 in nominal and real terms. b. Write down the budget constraint in Period 2 in nominal and real terms. Suppose that a household's utility, U = log c₁ + plog m₂ + Blog C₂, where m₁ is a real money balance (or real money holding). Find the optimality condition for real money holding and current consumption. Interpret it. d. Assume that C₁ = y, where y is real income or GDP. Derive a money demand function and velocity.

Answer rating: 100% (QA)

Solution aThe budget constraint in Period 1 in nominal terms is given by 1iB m1 y1 tiB The budg... View the full answer