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Macroeconomic Analysis 4

1 Tutorial 3

1.1 Question 1

Consider our model of three-period-lived individuals of chapter 8. Suppose the two-period real rate of return on capital is X = 1:44, the rate of population growth is n = 1:1, and the rate of fiat money creation is z = 1:2. Find the following net rate for both one and two periods:

a. nominal rate of interest;

b. real rate of interest;

c. rate of inflation;

d. real rate of return on money.

1.2 Question 2

Consider an economy in which there are 100 workers. One-half of the workers are endowed with 200 units of the consumption good when young and nothing when old. The remaining workers are endowed with 20 units of the consumption good when young and nothing when old. Each worker saves 30 percent of their endowment when young, either in money or deposits. Workers are not allowed to invest directly in capital. Let the gross real return on capital be 1.25. Money supply grows according to the following rule: Mt = 1:1Mt