Prof. Bryan Caplan

Econ 918

Spring, 1998

HW#1 (due in class, week 5)

(Please type your answers to all questions, including any mathematics. Each answer should be approximately 1-1.5 pages in length, double-spaced).

1. We have used a number of "infinitely-lived representative agent models," which examine what an economy would look like if it were populated with a large number of agents with identical preferences and abilities. Suppose that you were the representative agent. Answer and elaborate upon each of the following:

  1. What would be the five largest industries, measured in dollars? What would the price of a unit of output in each of these industries be?
  2. What would be the five highest paying jobs? The five lowest paying jobs?
  3. Would any products and/or jobs cease to exist?
  4. What would this imply about real interest rates, nominal interest rates, and the price level?
  1. The simple model of money demand doesn't explicitly consider the number and quality of money substitutes. Suggest the simplest possible way to coherently change the budget constraint and/or objective function to handle this. Write down the B.C. and O.F. for your new model, and set up Bellman's equation for your model.

If you can easily solve your model, do so. Does it have the "right" implications?

3. Answer ONE of the following:

  1. Contrast the endogeneity of the money supply discussed in King and Plosser to one other type of monetary endogeneity you are familiar with.
  2. Do King and Plosser successfully generate an RBC model with procyclical money supply?

4. Why is the inflation tax so low in the advanced industrialized countries? Could it conceivably be at its maximum? Suppose you ran a regression of inflation on x1=% of the workforce not engaged in agriculture, and x2=index of democracy (Kuwait=1, U.S.=10). Would x1 or x2 "work" better?

5. Discuss Hallman, Porter, and Small's attempt to handle pre-1950 instability of V2. Could a similar effort salvage their work in spite of the behavior of V2 over the last decade? How plausible would it be?