Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: daixieit

ECON20532 Macroeconomic Analysis IV

Resit paper 2022/23

Exam Questions

1. Consider the following economy. Individuals are endowed with y units of the consumption good when young and nothing when old, but would like to consume in both periods. The only asset available is fiat money. People face a lump-sum tax of T goods when young and a rate of change of the fiat money supply of z. The tax and the change in the fiat money stock finance government purchases of g goods for each old person in every period. There are N people in every generation (constant population). Assume also that each young person wants to hold real money balances equal to q.

(a) Denoting vt the value of money in terms of goods, write the government budget constraint in real terms. Explain the role of T; g and z. (25% of total mark)

(b) Derive the value of money (vt) for this economy. What does it depend on? (25% of total mark)

(c) Using your answers from points (a) and (b), derive the value of z (for given q, T and g) which ensures a balanced government budget. Discuss the results, explaining the conditions under which money supply would need to expand, remain constant or contract and why. (50% of total mark)

2. Consider an economy in which there are 1; 000 workers. Each worker is endowed with 200 units of the consumption good when young and nothing when old. Half of the workers consume 60% of their endowment when young, the other half only consume 40% of their endowment when young. Let the (gross) return offered by banks on deposits be 1:03, but workers need to pay a fixed fee of 3 goods in order to use a bank. Let the stock of fiat money be constant over time, with M = 10; 000:

(a) What is the aggregate level of savings in the economy? (20% of total question mark)

(b) Write down the money market-clearing condition and compute the value of fiat money. (40% of total question mark)

(c) What is the total nominal stock of money (outside plus inside) and what is the aggregate (real) value of fiat money balances in the economy? Why? (40% of total question mark)

3. Consider a random-relocation economy where each young person receives 200 units of the consumption good. There are 100 young people in the economy, and the population grows at 2% per year. The total stock of money is equal to $10,000, and it grows by 2% every year. Suppose a personís preferences are such that they only want to consume when old, and they dislike risk. We also assume that the probability that a person is relocated is 30% (known to everybody). Endowment goods can be transformed into capital, which gives a gross rate of return of 1.05 after one period. Capital cannot be sold or transformed back into consumption goods before maturity. Individual agents donít have the technology to convert goods into capital, but there exists a (perfectly competitive) banking sector that accepts deposits and can create in capital.

(a) What is the state contingent rate of return o§ered by banks on deposits? (20%)

(b) Write down the money-market clearing condition for this economy. How does the value of money change over time? (40% of total question mark)

(c) Compute the equilibrium value of money for this economy. (40% of total question mark)