Budget set of an individual in the monetary equilibrium

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Consider an economy inhabited by overlapping generations of two-period-lived individuals, each of whom receives an endowment of y in the first period of life and none in the second. The population of newborns grows as follows: Nt = nNt−1, where n > 1. The money stock (the only asset in this economy) is constant. (a) Find the equation for the budget set of an individual in the monetary equilibrium. Graph it. Show an arbitrary indifference curve tangent to the budget set and indicate the levels of consumption c1 and c2 that would be chosen by an individual in this equilibrium. (b) On the figure from part a, draw the feasibility line. Label your graph carefully, distinguishing between the budget and feasibility constraints. (c) Does the monetary equilibrium maximize the utility of future generations? Support your assertion with references to your figure.

Reference no: EM13998587

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