Money and Banking Problem Set III - Page 2 of 5 10/7/2020 1. (80 points) Prime Minister Osiris has come down with the feline coronavirus (look it up, it's actually a thing) and has tasked his second in command, Queen of the Nile, Lord and Savior of the Universe Isis to fill in for him while he is being cared for in a well-staffed medical facility that will be giving him a healthy dose of GS-441524 (very similar to Remdesivir, but more effective in cats... Again, it's a thing... Look it up). She is trying to get on board with how you do your economic modeling because she just like you want to be able to extend these models to analyzing business cycles, and this is the workhorse model for understanding how business cycles work in a general equilibrium context. You have the objective function U-In() -0 And the following constraints: 1. y = at 2. - Aski 3. i=k+1-(1-5)ke, and Isis would like you to solve the model out to be able to predict shocks to the economy. (a) (8 points) Show all three constraints can be combined to yield a = AA-ke-1 + (1 - 5) ke (b) (8 points) Formulate the Bellman Equation (c) (10 points) What are the first order conditions? Hint: You want 10/7/2020 Money and Banking Problem Set III - Page 3 of 5 0. (d) (8 points) Find av (+1) akt+1 (e) (10 points) What is the Euler Equation? () (10 points) What is the economic significance of the Euler Equation? Money and Banking Problem Set III - Page 4 of 5 10/7/2020 (8) (8 points) What is steady state capital? (h) (8 points) What is steady state output? ) (10 points) What is steady state investment? 6) (8 points) What is steady state consumption? (a) (10 points) Write out the general equilibrium from the previous problem. 2. (20 points) From the previous question, her Majesty Isis wants to know a bit about the Problem Set III - Page 5 of 5 Money and Banking 10/7/2020 general equilibrium (b) (10 points) Explain what happens if there is a shock to A. What equation does the shock originate in, and how will it affect the other equations in the general equilibrium? What endogenous variables will be affected? Be as specific as you can, but don't panic if you don't have it fully figured out. I want to see how you think on this question so I know how to go from here for this course! Money and Banking Problem Set III - Page 2 of 5 10/7/2020 1. (80 points) Prime Minister Osiris has come down with the feline coronavirus (look it up, it's actually a thing) and has tasked his second in command, Queen of the Nile, Lord and Savior of the Universe Isis to fill in for him while he is being cared for in a well-staffed medical facility that will be giving him a healthy dose of GS-441524 (very similar to Remdesivir, but more effective in cats... Again, it's a thing... Look it up). She is trying to get on board with how you do your economic modeling because she just like you want to be able to extend these models to analyzing business cycles, and this is the workhorse model for understanding how business cycles work in a general equilibrium context. You have the objective function U-In() -0 And the following constraints: 1. y = at 2. - Aski 3. i=k+1-(1-5)ke, and Isis would like you to solve the model out to be able to predict shocks to the economy. (a) (8 points) Show all three constraints can be combined to yield a = AA-ke-1 + (1 - 5) ke (b) (8 points) Formulate the Bellman Equation (c) (10 points) What are the first order conditions? Hint: You want 10/7/2020 Money and Banking Problem Set III - Page 3 of 5 0. (d) (8 points) Find av (+1) akt+1 (e) (10 points) What is the Euler Equation? () (10 points) What is the economic significance of the Euler Equation? Money and Banking Problem Set III - Page 4 of 5 10/7/2020 (8) (8 points) What is steady state capital? (h) (8 points) What is steady state output? ) (10 points) What is steady state investment? 6) (8 points) What is steady state consumption? (a) (10 points) Write out the general equilibrium from the previous problem. 2. (20 points) From the previous question, her Majesty Isis wants to know a bit about the Problem Set III - Page 5 of 5 Money and Banking 10/7/2020 general equilibrium (b) (10 points) Explain what happens if there is a shock to A. What equation does the shock originate in, and how will it affect the other equations in the general equilibrium? What endogenous variables will be affected? Be as specific as you can, but don't panic if you don't have it fully figured out. I want to see how you think on this question so I know how to go from here for this course
