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Week 6 - Problem Set

This document contains 4 problem sets related to mathematical economics. Problem 1 involves proving Euler's formula using Taylor expansions and induction. Problem 2 asks to show by induction that a matrix raised to a power takes on a specific form. Problem 3 sets up an SIR epidemiological model relating susceptible, infected, recovered, and deceased populations over time. Problem 4 describes a Taylor rule for monetary policy setting and asks to analyze the dynamics and long run behavior of inflation and unemployment.

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Aarthi Shankar
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22 views

Week 6 - Problem Set

This document contains 4 problem sets related to mathematical economics. Problem 1 involves proving Euler's formula using Taylor expansions and induction. Problem 2 asks to show by induction that a matrix raised to a power takes on a specific form. Problem 3 sets up an SIR epidemiological model relating susceptible, infected, recovered, and deceased populations over time. Problem 4 describes a Taylor rule for monetary policy setting and asks to analyze the dynamics and long run behavior of inflation and unemployment.

Uploaded by

Aarthi Shankar
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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EFIMM-0023, MRes Mathematics for Economics

Problem Set Week 7

1. Step by Step proof of Euler’s formula

eix = cos x + i sin x

De Moivre’s formula

(cos(θ ) + i sin(θ ))t = cos(tθ ) + i sin(tθ )

and t
( A + iB)t = ( A2 + B2 ) 2 (cos(tθ ) + i sin(tθ ))
for
A
cos θ = √
A2 + B2

(a) Use a Taylor expansion around 0 for eix , cos x and sin x to prove Euler’s
formula
(b) Use that (eiθ )t = etiθ and apply Euler’s formula
(c) [Induction] Using the representation

( A + iB) = cos(θ ) + i sin(θ )

and De Moivre’s formula show that

( A + iB)2 = cos(2θ ) + i sin(2θ )

Assume now that


t −1
( A + iB)t−1 = ( A2 + B2 ) 2 (cos(tθ ) + i sin(tθ ))

and calculate
( A + iB)t−1 ( A + iB)
Using De Moivre’s.

2. Show by induction that if  


r 1
[ B] =
0 r
then
r t tr t−1
 
t
[ B] =
0 rt

3. A simplified SIR model


Consider the following epidemological model for a population of size 1. There
are four type of citizens:
(a) The ones that are susceptible to contagion at time t, st
(b) The ones that are infected at time t, it
(c) The ones that have died up to time t, dt
(d) The ones that have recoverd up to time t, rt

By assumption it must be that for all t > 0

st + it + rt + dt = 1

and at time 0 we have the shock so

s0 + i0 = 1

where i0 is the original proportion of the population suffering a contagious dis-


ease.
The disease has been well studied and it is well know that with probability αt > 0
some people recover, so
r t +1 − r t = α t i t (1)
and with probability β t > 0 some people die, so

d t +1 − d t = β t i t (2)

Those that are recovered do not get the disease again. It is also well known that if
a susceptible citizen is in contact with an infected individual then the probability
of contagion is πt . The question is to understand what is the probability that a
susceptible individual is in contact with an infected one: ct . The dynamics of
infections, condition on ct , are given by

s t +1 − s t = − π t c t i t (3)

where we assume that αt + β t < 1 (they are proportions), and πt ct < 1.


The standard assumptions are that the epidemiological paramaters do not change
over time so αt = α, β t = β and πt = π, for all t ≥ 0. There is certain disagree-
ment about ct and during the course we will study different assumptions about
this term and different assumptions about the structure of the model. Note that
assumption (??) is different than the one made in class. Can you spot the differ-
ence?

(a) Assume first that ct = c is also constant and provide a description of the
model in matrix terms.
(b) Solve the model for arbitrary values of i0 , assuming that r0 = d0 = 0.
(c) What happens with the system in the long run? How does the proportion of
recovered people and dead people depend on parameters?
4. The Central bank of Narnia determines the policy according to a Taylor rule that
responds to inflation pt , the policy variable, by raising the interest rate rt . It is
well know that the policy follows the following rule:

r t = r t −1 + β ( p t − π ∗ )

for β ∈ (0, 1) and π ∗ is a given target. Unemployment µ responds to interest rate


in the short run according to the Phillips curve

µ t − µ t −1 = − α ( p t − p t −1 )

where α ∈ (0, 1). Finally, the economy responds to monetary policy according to
the short run adjustment

r t − r t −1 = − γ ( p t − p t −1 )

where γ ∈ (0, 1).

(a) Describe the dynamics of the economy in terms of the inflation rate and
unemployment
(b) Solve the model in its general form.
(c) Provide conditions for convergence of the system, and explain where and
how it converges
(d) If you have solved the problem correctly there should still be initial condi-
tions floating around. We are now going to close it in different ways.
i. Assume that the objective of the Government is to set the unemploy-
ment at µ∗ in the long run, since the unemployment rate is too high
today, µ∗ < µ0 . What happens with the interest rate in the long run?
ii. Assume that the objective of the Government is to set the interest rate
r ∗ > r0 in the long run, since there is need to attract international fund-
ing. What happens with the unemployment rate in the long run?

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