ECON 102 Lecture Notes - Lecture 11: Budget Constraint, Classical Dichotomy, Mattress
Document Summary
To understand long term impact of money on prices, consumption, and relationship between fiscal and monetary policy. Three periods to understand rate of change of inflation and we need a point in period 3 where money has some value, in the other timepoints money is just a transfer of wealth acorss periods. 3 agents: 1) household: perfectly competitive firm, government that conducts fiscal and monetary policy. Same government can conduct both fiscal and monetary policy, there"s no independent central bank. Prices are what differentiates real and nominal variables. Log m 3 /p 3 pins down price level and a sort of terminal condition (moeny created out of nothing so need to introduce terminal condition otherwise there is not solution), avoids problems of cashless economies (economies with finite horizon/ cash) M 1 = like checking account that individuals have. P 1 t 1 = transfer from gvt to individuals that acts like income.
