Question
In: Economics
Consider the following shocks in the two-period model with money. Suppose firms become infected with optimism...
Consider the following shocks in the two-period model with money.
Suppose firms become infected with optimism and expect total
factor productivity will be higher in the future.
i. What are the effects on the competitive equilibrium? Explain in
words and with diagrams.
ii. Explain the extent to which the model driven by optimism or
pessimism of this sort can or cannot replicate the key business
cycle facts. Be sure to reference which specific facts the model can
or cannot explain.
iii. Suppose the monetary authority wants to stabilize the price
level in the face of a wave of optimism. Determine what it will do
and explain how the competitive equilibrium responds.
Solutions
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3.
Rahul Sunny answered 2 years agoRelated Solutions
Consider the following shocks in the two-period model with money. Suppose there is an impatience shock...
Consider the following shocks in the two-period model with
money.
Suppose there is an impatience shock that causes the discount
factor ? to decrease.
i. What are the e?ects on the competitive equilibrium? Explain in
words and with diagrams.
ii. Explain the extent to which the model driven by an
impatience shock can or cannot replicate the key business cycle
facts (see Chapter 3 for a review!). Be sure to reference which
speci?c facts the model can or cannot explain
In the real business cycle model, suppose that firms become infected with pessimism (for example, due...
In the real business cycle model, suppose that firms
become infected with pessimism (for example, due to COVID-19
outbreak) and they expect that total factor productivity will be
much lower in the future.
a. Determine the equilibrium effects of this.
b. If waves of optimism and pessimism of this sort cause GDP to
fluctuate, does the model explain the key business cycle
facts?
c. Suppose that the monetary authority wants to stabilize the price
level in the face of a...
Consider a two-period binomial tree model with u = 1.05 and d = 0.90. Suppose the...
Consider a two-period binomial tree model with u = 1.05 and d =
0.90. Suppose the per-period interest rate is 2%. Suppose the
initial stock price is $100. Consider $95-strike call and put
options on this stock. Which of the following statement is
false based on above information?
The put premium is $12.01
Possible payoffs of a call at the end of the two periods are
$14.25, $0, and $0
Possible payoffs of a put at the end of the...
Consider the following two-period Fisher model of consumption. Jamil earns $600 in the first period and...
Consider the following two-period Fisher model of consumption.
Jamil earns $600 in the first period and $0 in the second period.
The interest rate is 10 percent. His lifetime utility function is
log(?1 ) + 0.5log(?2).
a) Find the optimal values of ?1 and ?2.
Answer: ?? = ???, ?? = ???
b) Suppose that the lifetime utility function changes to log(?1
) + log(?2). Calculate the new optimal values of ?1 and ?2. How is
the optimal value of...
In the two-period model of consumption, suppose that the first period income is $5,000 and the...
In the two-period model of consumption, suppose that the first
period income is $5,000 and the second period income is $5,500 for
both Jill and Jack. The interest rate is 10 percent. Jack’s
lifetime utility function is ?1 + ?2 while Jill’s lifetime utility
function is ?1 + 0.8?2.
1)Draw a graph that represents the common budget constraint that
Jill and Jack face.
2)Draw indifference curves of Jill and Jack in separate graphs
and compare the slopes of the indifference...
Consider the two-period Neoclassical consumption model seen in class. Suppose that income is measured in dollars....
Consider the two-period Neoclassical consumption model seen in
class. Suppose that income is measured in dollars. Let the utility
function take the logarithmic form U(C)=ln C, and the
representative consumer maximize her lifetime utility subject to
her budget constraint. Suppose that income in period 1 is $50,000,
income in period 2 is $30,000, ?=1 and ?=5%.
Do you think that the consumption profile of the agent in this
numerical example is going to be smoother than her income? If so,...
Consider a two-period model in which the consumer receives income of y in the current period...
Consider a two-period model in which the consumer receives
income of y in the current period and y' in the future period.
Rather than imposing lump-sum taxes, the government imposes a
proportional tax on consumption. In the current period the tax rate
is σ and in the future period the tax rate is σ'. As a result, the
government collects σc in goods in the current period and
σ'c' in goods in the future period. Since G and G'
are...
Consider a two-period model, inhabited by two individuals, Anna and Bob (or as they like to...
Consider a two-period model, inhabited by two individuals,
Anna and Bob (or as they like to be called, A, and B). A has the
following preferences
uA(c0,A cA1 ) = ln(cA0 ) + 0.9 ln(cA1 ), while B has the
following preferences
u B ( c 0 , B c B1 ) = l n ( c B0 ) + 0 . 8 l n ( c B1 )
.
Consumer A receives an income Y0A = 100 in period...
Consider a two-period model, inhabited by two individuals, Anna and Bob (or as they like to...
Consider a two-period model, inhabited by two individuals, Anna
and Bob (or as they like to be called, A, and B). A has the
following preferences uA(cA0, cA 1 ) = ln(cA 0 )+0.9 ln(cA 1 ),
while B has the following preferences uB(cB0, cB 1 ) = ln(cB0)+0.8
ln(cB1 ). Consumer A receives an income YA0 = 100 in period 0 and
YA1 = 150 in period 1. On the other side, Consumer B receives an
income YB0 =...
Consider a two-period consumption model where an individual has income It > 0 in period t...
Consider a two-period consumption model where an individual has
income It > 0 in period t and the (net) interest rate
is r > 0. However, suppose the price levels are not assumed to
be 1. Instead, let p2 ≥ p1 > 0.
(a) Derive the lifetime budget constraint.
(b) What is the slope of the lifetime budget line? Letting 1 + π
= p2/p1 bethe gross inflation rate, given an
interpretation of the magnitude of them budget line.
(c)...
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