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ECON 3430 Lecture Notes - Lecture 17: Commodity Money, Budget Constraint, Money Supply

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ivorycat684
1 Mar 2019
School
York University
Department
Economics
Course
ECON 3430
Professor
Georgios Stefanidis

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13

ECON 3430 Lecture Notes - Lecture 13: Fiat Money, Barter, Commodity Money

17

ECON 3430 Lecture Notes - Lecture 17: Commodity Money, Budget Constraint, Money Supply

18

ECON 3430 Lecture Notes - Lecture 18: Overlapping Generations Model, Money Supply, Budget Constraint

Document Summary

Econ 3430 lecture 17 notes a model of commodity money and the consumption of. Introduction: gold has two possible uses in this economy consumption and trade. It follows that there are two possible equilibria one in which gold is traded and not consumed and another in which gold is consumed: let us look first at an equilibrium in which gold is traded but never consumed. In each period, the young individuals consume a portion of their endowment and use the remainder to purchase gold. If individuals can obtain greater utility by trading gold for the consumption good, then they will not choose to consume their gold. In this case, the trading value of a unit of gold exceeds: which is its intrinsic value. In this case, trading 1 unit of the gold will give an individual: units of the consumption good, which will generate a certain amount of utility.

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Related Questions

Question 2 (3 points) If an individual bank receives $100,000 in new deposits and the required reserve ratio is 10 percent, the bank must keep the following amount of required reserves with the Fed?

$90,000.

$1,000,000. '

Zero.

$10,000.

 

Question 3 (3 points) Assume that the Fed purchases $10 million in bonds from a bank, the monetary base will: 

Increase by $10 million.

Remain unchanged.

Decrease by $10 million.

Increase by $5 million.

 

Question 4 (3 points) When we say that money has a function as a medium of exchange, this implies that:

Money must be in the form of a precious metal such as gold.

Money must be set at a fixed exchange rate in international currency markets.

Money is backed by the gold standard.

Money is used to purchase goods and services rather than resorting to barter.

 

Question 5 (3 points) Which of the following is not considered an asset for a bank: 

Customer deposits.

U.S. government treasury bills.

Corporate loans.

U.S. government-issued debt.

Consider an economy where each representative agent lives for two periods. In each period t, there are N_t young individuals and N_t-1 old individuals, where Nt/Nt 1 = 1. Each young individual obtains a quantity I_t of the unique good, which can be used for consumption in period 1 c_yt or saved s_t. In the second period, when the individual is old, h/she obtains a quantity I_t+1 of the good and obtains (1 + r_t) s_t. The old individual uses the proceeds for consumption c_ot+1. Assume the individual maximizes lifetime utility U = ln (c_yt) + I² ln (c_ot+1), where 0 < I² < 1.

a) State mathematically the individual's optimization problem.

b) Solve for the individual's utility-maximizing path of consumption c_yt and c_ot+1 and of saving st.

c) Will intergenerational transactions take place? Why/why not?

(Exercise 3.3, Capital controls, optional) Consider a two-period model of a small open economy with a single good each period and no investment. Let preferences of the representative household be described by the utility function U(C1, C2) = √(C_1 ) + √(C_2 ) The parameter  is known as the subjective discount factor. It measures the consumer’s degree of impatience in the sense that the smaller is , the higher is the weight the consumer assigns to present consumption relative to future consumption. Assume that  = 1/1.1. The representative household has initial net foreign wealth of (1 + r0) B_0^* = 1, with r0 = 0.1, and is endowed with Q1 = 5 units of goods in period 1 and Q2 = 10 units in period 2. The world interest rate paid on assets held from period 1 to period 2, r* = 10% (i.e., r* = 0.1) and there is free international capital mobility. Calculate the equilibrium levels of consumption in period 1, C1, consumption in period 2, C2, the trade balance in period 1, TB1, and the current account balance in period 1, CA1. Suppose now that the government imposes capital controls that require that the country’s net foreign asset position at the end of period 1 be nonnegative (B_1^* ≥ 0). Compute the equilibrium value of the domestic interest rate, r1, consumption in periods 1 and 2, and the trade and current account balances in period 1. Evaluate the effect of capital controls on welfare. Specifically, find the level of utility under capital controls and compare it to the level of utility obtained under free capital mobility. For this question and the next, suppose that the country experiences a temporary increase in the endowment of period 1 to Q1 = 9, with period 2 endowment unchanged. Calculate the effect of this output shock on C1, C2, TB1, CA1, and r1 in the case that capital is freely mobile across countries. Finally, suppose that the capital controls described in part (b) are in place. Will they still be binding (i.e., affect household behavior)?