ECON20532
Macroeconomic Analysis 4
2020/21
1 Tutorial 4
1.1 Question 1
Suppose there are 200 young people born each period. Each young person receives 200 goods, but nothing when middle-aged or when old. There is a storage technology. For each good put into storage in the current period, a person will receive one unit of consumption good next period. In addition, capital is available. For each unit of capital acquired in date t, 1.25 units of the consumption good will be received at date t + 2. If capital is liquidated after one period, then only 0.8 units of the consumption good can be obtained at date t + 1. Assume that 10 percent of the people want to consume only when middle-aged and the remainder want to consume only when old. All the saving is done through a bank.
a. How many goods will the bank hold in the form. of storage? How many in capital?
b. If there is no bank run, how many goods will middle-aged people consume? How many goods will an old person consume?
1.2 Question 2
Consider the random relocation economy developed in chapter 14. Each person receives an endowment of 500 goods when young and nothing when old. People only want to consume when old. Let Mt = 1:1Mt-1 for every period t. The net rate of return on capital is 15 percent.
a. Write down the return offered by the bank to a mover in the state con-tingent contract.
b. Write down the return offered by the bank to a non-mover in the state contingent contract.
c. Does this represent perfect risk sharing? Briefly explain your answer.
d. What would the growth rate of the money supply have to be in order to achieve perfect risk sharing? Is the monetary policy associated with perfect risk sharing the optimal policy setting?