Monetary economics

In an economy with n households, assume a household’s utility depends on the quantity of goods consumed, X, and on real money balances M/p

U=X^1/a(M/p)^1/a

Let the household have initial endowments Xo of goods and Mo of nominal money balances. The budget constraint faced by the household is then, in nominal terms

PX+M≤PXo+Mo

(a)What is the potential justification of the inclusion of money in the utility function?

(b ls money neutral in this economy Discuss analytically

(c If the economy was characterized by limited participation in financial markets, would your results change? Provide intuition without deriving the model.

Question-2

(a) briefly explain the real business cycle(RBC) model In particular discuss the type of shocks that drive business cycles and how these shocks propagate through the economy.

(b discuss to what extent the RBC model is able to explain the stylized facts of the macro economy and the business cycle.

(c Contrast and compare the predictions of BRC model regarding monetary policy and cyclicality of wages and prices to those of the Keynesian model with sticky nominal wages.

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