*assist kindly,

PART 2 I Money Demand (15 points) Consider a worker with an annual income of $90,000. Suppose he receives wage payments ( of equal value) three times a month. Consumption spending is constant at $90,000 a year. Assume that he holds no bonds. That is, he holds all financial assets in the form of money. Also assume that he begins the first period with no consumption goods. a. If the worker shops 6 times each month, what is the average money balance? Make sure that you draw a clear graph. (6 points) b. If he shops three times a month, what will his average money balance be? Make sure that you draw a clear graph. (6 points)III) Market Clearing (15 points) a. Suppose that the economy experiences a permanent negative shock to production. Assume that this change also shifts the marginal product of labor. Using three graphs, indicate what happens to aggregate output, Y; the interest rate R, the price level P and the real wage rate w/P. Explain intuitively what happens to the interest rate and why? Explain why the labor demand and labor supply curve move the way they did (10 points) b. Suppose instead that the shock was temporary and did not affect the MPL. How would the labor market clearing condition be affected? Explain clearly (5 points)(b) Solve for individual i's current period consumption function. (c) How does an increase in individual 's initial net debt (reduction in net financial assets) affect his consumer demand? Explain. (dj Now, add upthe consumer demandsof all individuals in this econ- omy; i.e., derive the aggregate consumption funct bon. Explain why it is highly unlikely that high levels of consumer debt are respon sible for suppressed aggregate consumer demand. What is a more likely culprit? 5. Let U = In(q ) + 3In(c,). Assume that there are only two types of individuals type A individuals have an endowment (14, 0); while type B individuals have an endowment (0, y;). Let 0 denote the fraction of type A individuals (a) Compute the CE allocation and price system for this economy. Does R depend on the parameters of the model in a reasonable way? (b) Suppose that the type A individuals suffered an adverse shock which lowered y4. How would type B individuals feel about this? Explain. ( c) It turns out that for some questions that we may be interested in asking, the qualit at ive answer does not depend on the heterogene- ity of individuals. For example, suppose that we are interested in asking: "How would a temporary adverse supply shock affect real interest rates?" We could go through all the trouble of modelling an economy with heterogeneous agents, as in the previous ques- tion, and find that Any 0. What if we made the (ridiculous?) assumption that all households were identical, i.e., with an endowment of (71, 12)-would we still get the same answer to our question? Solve for the competitive equilibrium and find out. Are the economic forces at work in the identical-agentsenvi- ronment any different than the heterogeneous agent senvironment when such a shock inflicts the economy?1. Consider the expenditure definition of GDP: Y = C+ I + G + NX. Can we conclude from this identity that an expansionary fiscal policy (i.e., an increase in G) must necessarily lead to an increase in GDP? Explain 2. Consider an economy with a representative household that has gref- erences defined over levels of 'market output ' (c) and 'leisure' ((); let MRS = (X/(), where A > 0. The household has one unit of time, which it may divide between work and leisure; ie., n + = 1. The real wage' for (productivity of) labour is given by the parameter > > 0. There is a government that levies an income tax 7 on households and allocates the acquired resources toward 'government purchases' g. The utility function representing household preferences is given by U = c+ Aln(() + 0in(g), where 0 2 0 (a) Provide an economic interpretation for the parameters ) and 0. (b) Write down the household's choice problem and solve for the opti- mal level of consumption and labour as a function of the tax rate. Hint: labour supply is given by: n$ = 1- X(1 - 7) :" (Assume that 0