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Can these 4 questions please be answered in simple explanation with all necessary working out please? Thanks 7. ( 10 marks) Consider the model of
Can these 4 questions please be answered in simple explanation with all necessary working out please?
Thanks
7. ( 10 marks) Consider the model of illiquidity where individuals live for three periods. Each individual is endowed with y units of the consumption good when young and with nothing in the other two periods of life. Let Nt be the number of individuals in the generation born at t with Nt=nNt1. There are two types of assets in the economy. (No inside money or private IOUs are available.) One asset is fiat money, with a fixed supply M. The other asset is capital. A unit of capital can be created from a unit of the consumption good in any period t and capital can be created in any amount. Two periods after it is created, a unit of capital produces X units of the consumption good and then disintegrates. Let X>n2. Assume that the stock of money is distributed equally to the initial middle-aged and each initial old can produce Xk0 units of the consumption good in the first period. Now suppose that an individual's preference is given by U(c1,c2,c8)=c1c2c8 (a) Find the rate of return on flat money. (2 marks) (b) Describe and explain how an individual finances his consumption in the secondberiod and third-period of life. (2 marks) (c) Write down the budget constraints faced by an individual when young, middle-aged and old. (2 marks) (d) Solve for the optimal stationary allocation of (c1,c2,c2) for all future generations. (4 marks) 7. ( 10 marks) Consider the model of illiquidity where individuals live for three periods. Each individual is endowed with y units of the consumption good when young and with nothing in the other two periods of life. Let Nt be the number of individuals in the generation born at t with Nt=nNt1. There are two types of assets in the economy. (No inside money or private IOUs are available.) One asset is fiat money, with a fixed supply M. The other asset is capital. A unit of capital can be created from a unit of the consumption good in any period t and capital can be created in any amount. Two periods after it is created, a unit of capital produces X units of the consumption good and then disintegrates. Let X>n2. Assume that the stock of money is distributed equally to the initial middle-aged and each initial old can produce Xk0 units of the consumption good in the first period. Now suppose that an individual's preference is given by U(c1,c2,c8)=c1c2c8 (a) Find the rate of return on flat money. (2 marks) (b) Describe and explain how an individual finances his consumption in the secondberiod and third-period of life. (2 marks) (c) Write down the budget constraints faced by an individual when young, middle-aged and old. (2 marks) (d) Solve for the optimal stationary allocation of (c1,c2,c2) for all future generations. (4 marks)Step by Step Solution
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