State the assumptions of the 4th generation Keynesian model and explain how its endogenous variables are determined graphically Graphically demonstrate how to construct an IS(LM) curve.
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State the assumptions of the 4th generation Keynesian model and explain how its endogenous variables are determined graphically
Graphically demonstrate how to construct an IS(LM) curve.
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- within the variable price fixed wage version of the keynesian model, analyze the effects of an increase in money demand (shift in liquidity preference) due to a loss confidence in stocks and bondsConsider the two-period Real Business Cycle (RBC) model without uncertainty presented in the lecture slides, but with one modification. Now assume that the instantaneous utility function for households takes the form: where Ct is consumption at time t and (1- lt) is leisure time at time t. Given that the time endowment is normalized to 1, it follows that lt is hours worked at time t. Finally, Ɵ > 0, b > 0 and gamma > 0 are parameters. All households in the economy are assumed to be identical. We can therefore consider a 'representative household' (henceforth 'the household'). Set t = 1 for the present period and set t = 2 for the next period. For example, C1 is consumption in the present period and C2 is consumption in the next period. Remember, this is a two-period model so there are no time periods prior to t = 1 and there are no time periods after t = 2 Assume that the household begins and ends life with no accumulated wealth and that the real interest rate is r (where…Consider the two-period Real Business Cycle (RBC) model without uncertainty presented in the lecture slides, but with one modification. Now assume that the instantaneous utility function for households takes the form: where Ct is consumption at time t and (1- lt) is leisure time at time t. Given that the time endowment is normalized to 1, it follows that lt is hours worked at time t. Finally, Ɵ > 0, b > 0 and gamma > 0 are parameters. All households in the economy are assumed to be identical. We can therefore consider a 'representative household' (henceforth 'the household'). Set t = 1 for the present period and set t = 2 for the next period. For example, C1 is consumption in the present period and C2 is consumption in the next period. Remember, this is a two-period model so there are no time periods prior to t = 1 and there are no time periods after t = 2 Assume that the household begins and ends life with no accumulated wealth and that the real interest rate is r (where…
- Consider the Real Business Cycle (RBC) model studied in class. Recall that this model features a representative household that lives for two periods. In the first period, the household derives utility for consumption and leisure C and l, respectively, and in the second period the household derives utility from consumption C'. Assume that the household’s preferences are represented by the utility function: U(C, l, C') = u(C) + θv(l) + βu(C'), where u and v are strictly increasing and strictly concave, θ > 0 is a parameter which captures how much the household values leisure, and β ∈ (0, 1) is the household’s discount factor. In the first period, the consumer supplies labour in a competitive market at the hourly wage w, pays lump-sum taxes T, receives dividends π, and decides how much to borrow or lend at the real interest rate r. In the second period, the household receives dividends π', pays debts or collects savings returns, and pays lump-sum taxes T' . (1) Write down the problem…Suppose the aggregate price level has decreased, but workers did not notice this initially. Suppose the supply curve of labor initially looked as follows. According to our self-correcting model, once workers notice that the aggregate price level has decreased, Group of answer choices a) the SL curve will increase (shift right). b) none of the other options. c) the SL curve will decrease (shift left). d) nothing will happen to the Supply of Labor (SL) curve. e) the equilibrium wage level, W, will rise.Consider the two-period household-maximization model discussed in class. The model is modified in order to look at applications including credit constraints, interest-rate markups, and taxation. A representative household lives for two periods and maximizes utility of consumption in period 1 and in period 2. The utility is represented by log(c) where c denotes consumption. Assuming no discounting between period 1 and period 2. The maximization problem for the representative household can be written as Max{logc1+logc2} c1+a1=y1-τ1+(1+r)a0 c2=y2-τ2+(1+r)a1 where y1 and y2 denote income levels in period 1 and period 2, τ1 and τ2 are taxes in the two periods, and a0 and a1 denote the assets of the households in each period. a0 is exogenously given. Assume the interest rate r = 0, and the government can borrow or save at the same interest rate so that its present-value budget constraint is given by where g1 and g2 are exogenous government expenditures in the two periods. (b). Show…
- (A Two-Period Sticky-Price Model). Consider a two-period, sticky-price economy like the one studied in lectures 11-13. Suppose that the household’s intertemporal optimality condition is of the form C2 C1 = β P1 P2 (1 + i), where C1 and C2 denote consumption in periods 1 and 2, P1 = P2 = 1 denote the price levels in periods 1 and 2, β = 0.9 denotes the subjective discount factor, and i denotes the nominal interest rate, which must satisfy the zero lower bound (ZLB). Suppose further that the full employment levels of output in periods 1 and 2 are given by Y¯ 1 = Y¯ 2 = 1, and that the economy is always at full employment in period 2 (the long run). Part 1: Suppose the central bank sets the nominal interest rate at the level i ∗ that minimizes unemployment without overheating. Calculate i ∗ . Part 2: Suppose that due to bad expected meteorological conditions, the full-employment level of output in period 2 is revised down to 0.8. Suppose that in response to this news, in period 1 the…Consider the two-period household-maximization model discussed in class. The model is modified in order to look at applications including credit constraints, interest-rate markups, and taxation. A representative household lives for two periods and maximizes utility of consumption in period 1 and in period 2. The utility is represented by log(c) where c denotes consumption. Assuming no discounting between period 1 and period 2. The maximization problem for the representative household can be written as max{log c1 + log c2} c1 + a1 = y1 − τ1 + (1 + r)a0 c2 = y2 − τ2 + (1 + r)a1 where y1 and y2 denote income levels in period 1 and period 2, τ1 and τ2 are taxes in the two periods, and a0 and a1 denote the assets of the households in each period. a0 is exogenously given. Assume the interest rate r = 0, and the government can borrow or save at the same interest rate so that its present-value budget constraint is given by g1 + g2 = τ1 + τ2 where g1 and g2 are exogenous government expenditures…Consider the two-period household-maximization model discussed in class. The model is modified in order to look at applications including credit constraints, interest-rate markups, and taxation. A representative household lives for two periods and maximizes utility of consumption in period 1 and in period 2. The utility is represented by log(c) where c denotes consumption. Assuming no discounting between period 1 and period 2. The maximization problem for the representative household can be written as max{log c1 + log c2} c1 + a1 = y1 − τ1 + (1 + r)a0 c2 = y2 − τ2 + (1 + r)a1 where y1 and y2 denote income levels in period 1 and period 2, τ1 and τ2 are taxes in the two periods, and a0 and a1 denote the assets of the households in each period. a0 is exogenously given. Assume the interest rate r = 0, and the government can borrow or save at the same interest rate so that its present-value budget constraint is given by g1 + g2 = τ1 + τ2 where g1 and g2 are exogenous government expenditures…
- Carefully examine and discuss the major differences of the Mundell Fleming Model in the short run as opposed to in the long run. Thereafter, analyse the impact of these differences on the Model. (provide graphical illustrations where needed)In the Heckscher-Ohlin model, modelling supply chains A is impossible. B can invalidate the factor price equalisation result. C allows countries to specialise in producing different intermediate goods D will imply that wages for skilled labour move in opposite directions in countries with relative abundance of skilled labour and countries with relative scarcity of skilled labour.1. (i) Which of the following is not true of the Keynesian model? Select one: A. The wage bargain is struck in terms of money wages. B. An increase in the expected price level would cause labour supply to decline. C. Imperfect information about prices explains fluctuations in output and employment. D. Price expectations are essentially forward-looking. E. An increase in the money wage for a given value of the expected price level would increase labour supply. (ii) Which of the following statement is not true? Select one: A. If money demand is completely interest insensitive, the LM curve is vertical. B. An increase in money demand for speculation shifts the LM schedule to the left. C. In the liquidity trap situation, increments to wealth would be held in the form of money. D. Keynes assumes that investors have a relatively fixed conception of the critical interest. rates E. A shift in the money demand function is also known as a shift in liquidity preference.
