Modeling Monetary Economies by Bruce Champ, Scott Freeman, Joseph Haslag

By Bruce Champ, Scott Freeman, Joseph Haslag

Too usually financial economics has been taught as a set of evidence approximately associations for college kids to memorize. by way of educating from first ideas in its place, this complex undergraduate textbook builds on an easy, transparent financial version and applies this framework constantly to a wide selection of financial questions. beginning with the case during which exchange is collectively worthwhile, the e-book demonstrates that cash makes humans at an advantage, and that govt funds competes opposed to different technique of funds, together with different kinds of executive cash. After constructing every one of those themes, the e-book tackles the difficulty of cash competing opposed to different shops of price, interpreting concerns linked to exchange, finance, and sleek banking. The publication then strikes from basic economies to trendy economies, addressing the function banks play in making extra trades attainable, concluding with the data difficulties plaguing glossy banking, which bring about monetary crises.

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1. Suppose utility equals ln(c1,t ) + β ln(c2,t+1 ) where ln(c) represents the natural logarithm of c, whose derivative equals 1/c. The parameter β is a positive number. a. Prove that real money balances are q∗ = βy 1+β ∗ ∗ b. Derive expressions for the lifetime consumption pattern c1,t and c2,t+1 . c. What effect does an increase in β have on real money balances and the lifetime consumption pattern? Give an intuitive interpretation of the parameter β. 12 on Thu Oct 11 06:42:36 BST 2012. 1017/CBO9780511977411 Online ISBN: 9780511977411 Hardback ISBN: 9781107003491 Paperback ISBN: 9780521177009 Chapter 2 - Barter and Commodity Money pp.

The Economic Problem The problem facing future generations of this economy is very simple. They want to acquire goods they do not have. Each has access to the nonstorable consumption good only when young but wants to consume in both periods of life. They must therefore find a way to acquire consumption in the second period of life and then decide how much they will consume in each period of life. We examine, in turn, two solutions to this economic problem. The first, a centralized solution, proposes that an all-knowing, benevolent planner will allocate the economy’s resources between consumption by the young and by the old.

Without fiat money, people are unable to trade for the good they desire, c2 , because they do not own anything that the owners of these goods, the next generation, desire. With fiat money, however, people are able to trade for the goods they desire despite this absence of a double coincidence of wants. People sell some of the goods they have for fiat money and then use the money to buy the goods they want. In this model economy, therefore, fiat money serves as a medium of exchange. It is not consumed, nor does it produce anything that can be consumed.

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