Economics

8. Consider an exchange cash-in-advance economy similiar to that studied by Alan Stockman in which the money supply, Mr, grows at the (gross) constant rate u > 0 so that M, = /M,-1. The endowment in this economy is stochastic and can take on two values (x1, x2) with x1 g. There is no uncertainty. The price of the equity is the present discounted value of this dividend stream. What is the price-dividend ratio? (Hint: I would do this in continuous time, but you don't have to.) 5. Re question (4), what happens to the price-dividend ratio when there is a permanent increase in ? How about when there is a permanent increase in g? Briefly provide economic intuition for each. Longer Answer Questions (Each question is worth 25 points.) 6. Risk neutrality v. certainty equivalence: Imagine a consumer with time-separable preferences, E, EcoBu(Cits). where 0