Un modelo simple de dinero

Facultad de Ciencias Económicas y Sociales
Profesor: José Ramón Acosta
Materia: Microeconomía

A SIMPLE MODEL OF MONEY

Integrantes:
Pedro Becerra carnet # 200900200
Ana Lluberes carnet # 200903320
Nicolás Hernández Carnet # 200900530
María Alejandra Coidakis # 200904290
An effective way of understanding monetaryeconomies is through simplified models that replicate their essential features, for they illustrate key elements of the behavior of people when dealing with money. One of these features is the fact that money is simple a medium of exchange: we don’t consume it; we need it to buy things we consume. Therefore, in a monetary economy there has to be something preventing people from simple tradingthings in the absence of money. Second, money has to be an asset held over some period of time before it is spent. Regarding this last feature, the most widely used framework that meets it is called the overlapping generations model, in which some people, but not all, live into the next period.

In the basic form of this model, people live for two periods: when they are young, and when theyare old; the economy begins in period 1. Nt determines the number of individuals born in period t; in period 1, there are N0 members of the initial old. Therefore, in each period there are Nt young individuals and Nt-1 old individuals. For simplicity, each individual receives an endowment of one single consumption good in the first period of life, but no endowment in the second one.Hence, each individual has to choose between the different combinations, or bundles, of the consumption good over time in order of preference; that is, deciding on how much to consume when young and how much to consume when old. An indifference curve is used to illustrate all bundles that yield utility to the individual; for example, if bundle A: 3 units of good consumption when young and 6 when old,and bundle B: 5 units when young and 4 when old, both lie on the same indifference curve, it means that the consumer is equally happy when consuming either bundle.
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As we can get from intuitive sense, the individual will be willing to give up more units of consumption today for consumption tomorrow if the good is currently abundant; however, if the good is currently scarce, theindividual will need several units of consumption tomorrow to compensate him for the lost of consumption units today. This is called the diminishing marginal rate of consumption, and it explains why the curve is steeper towards the vertical axis and much flatter towards the horizontal axis.

A group of indifference curves shown on a graph is called an indifference map. As indifferencecurves move northeasterly, utility increases. Therefore, curves in an indifference map can never cross.

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The economic problem is simple: people only receive consumption goods when young, but they want to consume in both periods of life; therefore, they must find a way to acquire consumption in the second period of life and then decide how much they will consume in eachperiod. Yet, the total consumption in both periods of life for all individuals cannot exceed the total amount of available goods. A feasible set represents all the possible allocations of consumption goods that can be distributed without exceeding those available in the economy.

The shaded area in the triangle represents all the feasible allocations; the diagonal line on its boundary is calledthe feasible set line. One simple objective to decide on which combination of allocations to use is the maximization of the utility of the future generations; this objective is called the golden rule, and it yields the highest feasible level of utility over an individual’s entire lifetime. In the graph, the golden rule occurs in the only point of tangency between the feasible set line and the...