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ECO00001M

MSc Degree Examinations 2018-9

Advanced Macroeconomics I

SECTION A

NOTE: Answer ONE question from this section

1. Using a general equilibrium model, show that monopoly power does not, by itself, cause monetary policy to be eﬀective. Does the introduction of small, lump-sum, costs of adjusting prices into such a model guarantee that monetary policy will be eﬀective?

2. In Calvo’s model of staggered price setting, what is the role of the ‘new price’ variable? Explain how the response of this variable to a money supply change depends on the parameters of the model.

3. If prices are set for two periods at a time, and if half the ﬁrms set prices in even-numbered periods and the other half in odd-numbered periods, does this mean that a monetary shock can aﬀect output for at most two periods?

SECTION B

NOTE: Answer BOTH questions from this section.

The maximum total marks for each question is 100. Answer ALL parts of each question.

The points for each part are given within square brackets, [ ], at the end of the question

part.

4. Use no more than 50 words to answer each part.

(a) Consider a simple OLG model with one good in each period and one agent born in each period, and comment on the statement “in the absence of ﬁat money, no competitive equilibrium allocation is a Pareto optimal allocation, and in the presence of money every competitive equilibrium allocation is a Pareto optimal allocation”. [35%]

(b) Consider the simple OLG model with one good in each period and one agent born in each period and comment on the statement “if the economy has a competitive equilibrium in which prices and allocations are periodic with a periodicity of 7 then the same economy also has another competitive equilibrium with a cycle of periodicity 10”. [30%]

(c) Consider the OLG model and identify two reasons that you believe justify its use to study issues in macroeconomics, and two other reasons that suggest that the model is inappropriate for such purposes. [35%]

5. Consider the following economy with generational overlap. One agent is born at each date t ≥ 1 and lives at dates t and t + 1. A single perishable good is available for consumption at each t. Each agent has preferences represented by a utility function lnxt,t+ β · , 0 < β < 1, where xt,t and xt,t+1 denote quantities consumed by the agent born at t when young and when old respectively, and endowment (6, 2). There is also an initial old agent who lives only at date 1, has an increasing utility function and is endowed with one unit of the good.

(a) Find the Golden Rule allocation as a function of β. [25%] For the remainder of the question, assume that a government buys the constant amount g ≥ 0 of the good every period and ﬁnances its purchase by printing money.

(b) Set up the optimisation problem faced by an agent in a competitive economy with money and constant government real expenditure ﬁnanced by printing money. [15%]

(d) Obtain the nonlinear diﬀerence equation in the variable µ where µ := t .