Consumer has utility function In(c1)+beta*In(c2), where beta=1. Interest rate i=0%. (NOTE!) Income y1=10 and y2=50. Gov't gives consumer a free stimulus check of $20 in the first period. Assume consumers are sophisticated (have rational expectation), then in the second period the consumer will consume c2=

Consumer has utility function In(c1)+beta*In(c2), where beta=1. Interest rate i=0%. (NOTE!) Income y1=10 and y2=50. Gov't gives consumer a free stimulus check of $20 in the first period. Assume consumers are sophisticated (have rational expectation), then in the second period the consumer will consume c2=

Macroeconomics

13th Edition

ISBN:9781337617390

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter15: Monetary Policy

Section: Chapter Questions

Problem 2WNG

See similar textbooks

Similar questions

Consumer has utility function ln(c1)+beta*ln(c2), where beta=1. Interest rate i=0%. (NOTE!) Income y1=10 and y2=50. Gov't gives consumer a free stimulus check of $20 in the first period. Assume consumers are sophisticated (have rational expectation), then in the first period the consumer will consume c1=______.
What is meant by “excess sensitivity” of consumption? Is this view of consumption consistent with the permanent-income hypothesis? Explain. How does the stock market affect consumption according to the permanent-income hypothesis? Is this prediction in line with the empirical evidence? Explain.
Assuming a mix of present and future consumption is preferred, ANY consumer who starts at point A will gain utility from a rise in interest rates. is it true or false
An investor has a von Neumann-Morgenstern utility function, u(c)=-e^(-αc), where c represents consumption and α > 0. There are two equally probable states of nature, called 1 and 2, and two assets that can be acquired, each of which is attractive in a state of nature as follows: Each unit of asset 1 yields one unit of consumption in state 1 and nothing in state 2. Each unit of asset 2 yields nothing in state 1 and one unit of consumption in state 2. The price of each asset i is denoted by πi, which are normalized to π1 + π2 = 1. The investor has a monetary wealth of w units that must be distributed between the two assets. Denote xi the number of units of asset i that he acquires. Formulate the investor's expected utility maximization problem, subject to your budget constraint. Find the optimal quantities x of each asset i for this investor. How do these amounts of assets vary according to the α parameter? What is the economic interpretation of this relationship?
Kevin's reference dependent utility over money is y and effort is E, refer to the: instantaneous utility function: rt: reference point for wealth, which demonstrated his recent wealth Kevin does not have from money but from gains and losses of money instead. There is no discounting, and assume that Kevin's current wealth from his job is 0. Kevin is thinking about a new role at work which allows him to increase his income by $1000 per period for two periods, counting from the current period, which is t = 0. He must undergo a training which require an effort of EO = 3500 at that value of alpha, how much ultility would Kevin lose relative to his non-projection-biased preferences if she took the position 1000 250 500 750
Under the Pure Expectations Theory, if these investors believe that interest rates will rise in the near future, a. Two statements are correct. b. they will make up for the lower short-term yield when the short-term securities mature, and they reinvest at a higher rate (if interest rates rise) at maturity. c. All statements are correct. d. the large supply of funds in the short-term market will force annualized yields down, while the reduced supply of long-term funds forces long-term yields up. e. they will invest their funds mostly in the short-term risk-free securities so that they can soon reinvest their funds in securities that offer higher yields after interest rates increase. f. their actions cause funds to flow into the short-term market and away from the long-term market. g. Three statements are correct.
Indicate whether the statement is true or false, and justify your answer.Consider two investment streams w and z which pay out some amount, w(t) and z(t), in each period t. (The amount may be negative in some periods.) If the interest rate is exactly equal to the internal rate of return of w(t), the net present value of choosing w over z is zero.
Consider an economy in which there is one consumer born at the start of each time period. Each consumer lives for two periods and receives an endowment of 1 unit of the consumption good when young. At the start of the economy there is a consumer who is already old. This consumer owns one unit of money but has no endowment of the consumption good. Money has no intrinsic value. a. Can money be valuable in a finite economy (one that has a known end point)? b. Can money be valuable in an infinite economy? c. Can money allow exigency to be attained?
Q) Assume consumers with standard preferences live for two periods. They receive an income in each period (? and ?′) and pay lump-sum taxes to the government (? and ?′). Credit markets are not perfect, and borrowers are charged a higher interest rate than lenders. The government never defaults, and faces the lenders’ interest rate whether it borrows or lends. Which are true? a) The number of lenders is equal to the number of borrowers b) A reduction in taxes in the current period without changes in the lifetime burden of taxes increases current consumption for a lender c) A borrower is better off if there is a reduction in the interest rate paid by borrowers d) A borrower is better off if there is a reduction in the interest rate paid by borrowers, but only if the substitution effect dominates the income effect e) A reduction in taxes in the current period without changes in the lifetime burden of taxes may transform a borrower into a lender
According to Milton Friedman, when the public holds more cash balances than it desires at any level of interest rates, the public tends to: (a) increase PCE and personal savings while reducing personal debt; (b) sell fixed income securities; (c) give money away to the charities of their choice; (d) eat more tacos.
Josh is playing blackjack for real money. He has reference-dependent preferences over money: if his earnings are m and his reference point is r, then his utility is v(m − r), where the value function v satisfies v(x) = ln(x + 1) for x ≥ 0, and v(x) = −2 ln(−x + 1) for x ≤ 0. assume that Josh’s reference point is 0 Euro (that is, no wins or losses) and for the given situation, answer the following questions: (i) What is the g for which Josh would be indifferent between taking a fifty-fifty win g Euro or lose 5 Euro gamble? (ii) Does this reflect risk loving or risk averse behavior? (iii) What feature of Josh’s reference-dependent preferences is driving this choice?
If long-term interest rates are 8% and short-term interest rates are 3%, the market expects that: A) short-term rates will remain the same in the future. B) there is no relationship between long-term and short-term rates. C) short-term rates will rise in the future. D) short-term rates will fall in the future.