class diary

Tu, 06/17/14

Welcome to Econ-4721!

We introduced each other and then made a quick review of the syllabus.

I'll teach the first part of this course. If you missed today's class please see the syllabus. We will have office hours by appointment.

We started by posting some key questions about money and its role in an economy. We said that money is better described by its functions: 1) medium of exchange, 2) store of value, and 3) unit of account. We then talked a little bit about history. We made the difference between commodity and fiat money. The first has intrinsic value in the sense that they may be used in consumption or production. The second does not have an inherent value. We, however, will learn that fiat money will be valued because it could be used as an exchange facilitator device.

We will use the overlapping generations model in order to study the role of money as a medium of exchange. We described the environment of the simple version of this model. We started by assuming that money does not exist. What I basically tried to do today was telling a tale, story, or fable. I left a question for you: What would be the end of today's story?

Please read Chapter 1 from the textbook.

Tu, 06/18/14

We finished the discussion of the overlapping generation model (OLG) without money. The main take away is that trade was not possible because of the absence of a coincidence of wants. We then proceed to extend this simple version of the model by including fiat money, that is, paper money. We saw that now trade was possible because in a given period old guys have fiat money which is what the young guys want and the young guys have consumption goods which is what old guys want. That is, fiat money allow for the coincidence of wants to happen. We also stressed that even though paper money does not have an intrinsic value it will be valued as money plays the role of a medium of exchange.

We, finally, stated and solved the optimization problems of the initial old generation and future generations.

Please keep reading Chapter 1 from the textbook

Tu, 06/19/14

We discussed the intuition behind each optimization problem. We used an example in order to clarify concepts. We also talked about the intuition behind the algebraic expressions for the optimal values of each of the choice variables: consumption when young, consumption when old, and money holdings. The problem of the initial old generation is much easier to grasp. We stressed that this discussion was about partial equilibrium in which prices are taken as given. We started to analyze the general equilibrium of an OLG model in which money supply is constant across time.

Please start reading Chapter 3 from the textbook.

Tu, 06/24/14

Today, we completed the definition of a competitive equilibrium. We then covered an example with numbers. We covered two cases: when the size of the generation born in t could vary and when it is constant. I left two exercises for you. In the first one you have to show that the Walras' Law applies in the CE of an OLG model. In the second you have to draw the path of M, m, v, and p across time in the case in which the size of the generation born in t grows at rate n.

Next class we will talk about Pareto Efficiency. Read Chapter 1 and Chapter 3.

Tu, 06/26/14

Homework 2 is posted

Today we talked about Pareto Efficiency. We saw that the Competitive Equilibrium (CE) allocation is Pareto Efficient. We do this by deriving the Social Planner problem and by comparing its solution with the solution of the CE problem.

We then extended the model by assuming that money supply grows at a rate z. We then defined the CE in this OLG model with growing fiat money and covered an example.

Please read Chapter 3 from the textbook. Next class we will discuss the inefficiency caused by inflation.

Tu, 07/01/14

In the first two hours I answered questions about the first problem set. We then talked about the inefficiency of the competitive equilibrium allocation when money supply grows.

Please read Chapter 4 from the textbook.

Tu, 07/03/14

Homework 2 is due

In the first hour we talked about the PS1. We sketched the answer key.

We then continued with the lecture. We claimed that inflation may be regarded as a distortionary tax. In order to make the case that inflation is indeed a distortionary tax on money holding we have to compare it to a lump-sum tax. We discussed 2 cases: (a) government expenditures are financed with money (and thereby inflation),and (b) government expenditures are financed with lump-sum taxes levied on the old generations. We went through each case and solved for the consumer's allocations, that is, consumption when young, when old, and real money holdings. We then verified that although consumption when young is greater in case (a), consumption when old is lower in this case. Therefore, apparently, it is not obvious in case the consumer is better-off. Think about that for next class.

Please read chapter 4 (up to page 82) from the textbook.

Stats are (/100):

Mean: 92

Median: 94

Standard deviation: 9

Max: 100

Min: 65

Tu, 07/08/14

Tu, 07/10/14

Midterm

Time: 11:00am-1:00pm

Location: Carlson School of Management 1-143

Stats are (/100):

Mean:

Median:

Standard deviation:

Max:

Min: