A. 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...

Extracted text: A. 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 the supply of fiat money is constant at M. Furthermore, each person is endowed with y units of the consumption good when young and zero when old. The only difference between the two economies is regarding preferences. Other things being equal, people in economy A have preferences that lean toward first period consumption whereas individual preferences in economy B lean toward second period consumption. We will also assume stationarity. The lifetime budget constraints and typical indifference curves for people in the two economies are represented in the diagram below (Diagram 1). i) Will there be a difference in the rates of return of fiat money in the two economies? If so, which economy will have the higher rate of return of fiat money? Give an intuitive interpretation of your answer. ii) Will there be a difference in the value of money in the two economies? If so, which economy will have the higher value of money? Give an intuitive interpretation of your answer.


Extracted text: Diagram 1 Economy A Economy B C2 C2 y y c2* C2 C1 C1 ci* y cı* y B. Consider the following model where the monetary policy will be the only policy variable affecting demand for output. For expositional purposes the income velocity of money is held constant. With these assumptions the aggregate demand for output can be written in logs as: mt + v = Pt + yt The above equation is the equation of exchange in logs (equation that addresses the relationship between money and price level, and between money and nominal GDP. The equation tells us that total spending (M x V) is equal to total sales revenue (P x Y)). To complete the model we need to add the aggregate supply equation and a money supply rule. yt = y'+ a(pt - Et-1pt) (2) mt= Byt-1+Et (3) Given that agents form expectations rationally, find a solution for (i) yt and (ii) pt. Is there any scope in this model for the policy authorities to influence the output through systematic stabilisation policy? Explain your answer.