ECON 3K03 McMaster University Monetary Economics Questions Paper

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work assignment and two day ,THIS PAPER INCLUDES 4 PAGES AND 3 QUESTIONS.

Consider a 2-period overlapping generations economy with an initial population N0 = 2, 000.

Each generation is n = 1.1 times larger than the previous one. Each individual is endowed

with y1 = 50 units of the consumption good when young, and y2 = 5 when old. Preferences

are such that each individual wants to consume more than y2 when old. The initial old are

endowed with M0 = 1, 000 units of fifiat money. The money stock grows at rate z = 1.1 every

period. The government uses newly created fifiat money in every period t to purchase g units

of the consumption good per old person, it is thus wasteful from the consumers’ perspective.

Assume stationary allocations of consumption throughout the exercise.

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Econ3k03 Monetary Economics

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Econ3k03 Monetary Economics
Question 1
The following are the given information about the consumption of goods in an economy
for 2-period overlapping generation.
Initial production N0 = 2,000
Growth rate per generation is 1.1 times
Endowment for young individual y1 = 50 units
Endowment for old individual, y2 = 5 units.
Initial endowment of fiat money for the old, M0 = 1,000 units of fiat money.
Growth rate of money stock per period, z = 1.1 times
Period = t
Units of goods generated per period = g

Assuming that the number of goods endowed to an individual is c goods. The

individual has the option of either consuming the provided good or selling it to earn money from
the sale. From the provided information, there is no member of the future generation born while
endowed with fiat money. Hence, they have to trade to earn the fiat money. At a time t, the study
assumed that the number of dollars that an individual acquires with a period t is Mt. Thus, the
total number of goods sold by the population for money would be vt*t. Besides, c1 and c2
denotes the consumption for the first and second periods.
c1 + c2 = y
Therefore, an individual’s budget constraint in period t is ...

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