Download e-book for iPad: Advanced Macroeconomics Solution Manual by David Romer

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That will depend upon the gross rate of return on storage, x, relative to the gross rate of return on money, which is Pt/Pt+1 . The gross rate of return on money is Pt/Pt+1 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 2-30 Solutions to Chapter 2 since the individual can sell one unit of consumption in period t and get Pt units of money.

13 With government purchases in the model, the capital-accumulation equation is given by (1) k ( t )  f  k ( t )   c( t )  G ( t )  ( n  g) k ( t ) , where G(t) represents government purchases in units of effective labor at time t. © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Since intergenerational trade is not possible, individuals are "forced" into storage because that is the only way they can save and consume in old age. They must do this even if the return on storage, x, is low. However, at any point in time, a social planner could take one unit from each young person and give (1 + n) units to each old person since there are fewer old persons than young persons. With (1 + n) > x, this gives a better return than storage. Therefore, the social planner could raise welfare by taking the half of each generation’s endowment that it was going to store and instead give it to the old.

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Advanced Macroeconomics Solution Manual by David Romer


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