Lastrapes Fall y t = ỹ + a 1 (p t p t ) y t = d 0 + d 1 (m t p t ).

Size: px
Start display at page:

Download "Lastrapes Fall y t = ỹ + a 1 (p t p t ) y t = d 0 + d 1 (m t p t )."

Transcription

1 ECON 8040 Final exam Lastrapes Fall 2007 Answer all eight questions on this exam. 1. Write out a static model of the macroeconomy that is capable of predicting that money is non-neutral. Your model should have three endogenous variables: the price level (P ), real output (y), and the interest rate (R). Describe each of the equations in the model, prove that it implies that money is non-neutral, and explain why money is non-neutral. 2. Suppose that the macro economy can be described by the following linear dynamic model, where all variables are in logs and are defined as in class, and all parameters are positive: y t = ỹ + a 1 (p t p t ) y t = d 0 + d 1 (m t p t ). Here, p t represents agents expectations of the price level, conditional on information at time t 1. a. Assume that p t = p t 1. How will a permanent increase in the stock of money affect real output in the short-run and the long-run? Explain. b. Assume that p t = E t 1 p t, the mathematical expectation of the price level, conditional on all information up to time t 1. How will a permanent increase in the stock of money affect real output in the short-run and the long-run? Explain. 3. Assume that all markets clear, agents respond to relative prices, and expectations are formed rationally in the economy. Markets, however, are separated, so that information about aggregate nominal shocks and relative price shocks is incomplete when decisions are made, even when local prices are observed. How might an aggregate shock to the money supply affect the price level and real aggregate production in such an economy, and why? As local prices become more informative about aggregate nominal shocks, what will happen to the response of output and prices to money supply shocks? 4. Consider a household s problem of optimal intertemporal consumption, where interest rates and income are known and exogenous. Suppose that the government sector imposes a proportional tax on the interest income earned by the household (i.e. the net return from owning capital); the tax rate is ρ. Write the household s budget constraint that includes the effects of this tax, and fully describe the effects on the optimal consumption path of an increase in ρ. 5. Write a short essay on the Ricardian Equivalence theory. In particular, state the basic predictions of this theory and the conditions under which the predictions will hold. 1

2 6. Suppose long-run growth in an economy is characterized by Solow s neoclassical model, where the labor force grows at rate n and technology grows at rate g. Assume that a quick wave of immigration causes the economy s labor force to jump at a point in time (while the steady state population growth remains constant at n). Explain the effects of this immigration wave on both the level and growth rates of capital per effective worker and output per effective worker, in the short run and the long run. Use a graph if it aids your explanation. 7. A central planner chooses consumption (c) and capital (k) paths to maximize t=0 ( ) c β t 1 θ 1 θ subject to k α t = k t+1 (1 δ)k t + c t, where the initial level of capital is given, capital can never be negative and β and α take on values between 0 and 1. a. Derive the Euler equation for this optimization problem. b. Use a phase diagram to describe the dynamics of the economy if the capital stock begins at a level higher than its steady-state value. 8. In the AK model of optimal (endogenous) growth, we derived the following steady-state relationship: r = i + θg, where r is the market interest rate, i is the rate of time preference, 1 θ is the elasticity of intertemporal substitution, and g is the growth rate of consumption. a. Explain where this equation comes from and what it means in the context of the model. b. What happens to steady-state growth in this model if both i and the (constant) marginal product of capital fall. Explain. 2

3 Guide to answers 1. Here is the simplest possible model that works: y = y(p), y (p) > 0 y = D(r), D (r) < 0 M/p = m(r, y), m r < 0, m y > 0 where y is output, p is the price level and r is the interest rate. M is exogenous money supply. The first equation is aggregate supply, reflecting the effect of the price level on production. The positive derivative of the supply function presumes some sort of rigidity that yields the upward sloping supply. The second equation (the IS curve) shows that interest rates have a negative effect on aggregate demand, presumably through consumption and investment. The third equation is money market equilibrium: real money supply equals real money demand. Money is non-neutral if changes in its quantity have real effects, on output in this model. It is easy to show, given the constraints on the slopes, that y M > 0. As money increases, say, the price level tends to rise, providing incentives for increased production through the aggregate supply curve (e.g. nominal wages might be exogenous so real wage falls as price rises). As output rises, the interest rate will fall to ensure that the demand for output rises to accommodate the increased supply. Money works through a liquidity effect. 2. Phillips curve dynamics. The model assumes that households are imperfectly informed about the price level, so expected price shows up in the supply curve. a. This is the case of a very simple version of adaptive expectations. It is easy to show that the equilibrium price level is a first-order difference equation. Solving this difference equation and substituting into the demand curve yields the reduced form for equilibrium output, which shows that output depends on current and lagged values of the nominal money stock. The dynamic multipliers show that output rises in the short run as money rises, but gradually falls to its initial level in the long-run. In the long-run p = p. b. This is the case of Rational Expectations. In this case, the nature of the change in money matters. In particular, if the change in money is anticipated, then there will be no effect on output in the short-run or the long-run. If, however, the change is unanticipated, output will be positively related to money in the short-run. Since there are no other dynamics in the model, this real effect is short-lived: output will return to its original value after only one period, since the change is unanticipated for only one period. 3. The conditions described are consistent with Lucas s theory of the business cycle. Suppose that the monetary authority increases the money supply uniformly throughout the economy, but this action is not known by individual producers when their production decisions are made. Because money has risen everywhere, each producer will observe the price of his or her good rising. However, each producer believes, given the history of prior shocks, that, at least to some extent, the rising price reflects an increase in his or her relative price. Therefore, the 3

4 representative producer has an incentive to increase output in response to this (perceived) relative price increase. Because all producers are similarly myopic, the aggregate shock to the money supply results in an increase in aggregate output (and a smaller increase in the price level than would have been if the shock had been perceived. Lucas s model assumes that producers know the probability distribution of shocks, and use this knowledge to rationally predict the price level from past forecasts and currently observed prices. As the variance of aggregate shocks increases, local prices will better reflect the source of shocks to the market; producers will place more weight on local price in predicting the price level. Thus, since producers are less fooled when an aggregate shock comes along, they will respond by increasing output less in the face of a positive aggregate shock. The aggregate supply curve becomes steeper. 4. If there is a tax on interest income, the households budget constraint becomes A t+1 = (A t + y t c t )[1 + (1 ρ)r] where A are financial assets, y is labor income, c is consumption, r is the interest rate on assets, and ρ is the tax rate. If we define the after tax interest rate as r = (1 ρ)r, then the problem is identical to the one discussed in class, except we replace the interest rate with the corresponding after tax rate. Thus, an increase in ρ ceteris paribus in effect lowers the return to saving, causing the budget line to rotate counterclockwise around the no borrowingno lending point. The effects of this change on consumption paths depends on whether the household is originally a net lender or borrower. If a lender, then future consumption will fall unambiguously, while current consumption will rise or fall depending on the relative strength of the income and substitution effects. If a borrower, then current consumption unambiguously rises (the rise in the tax rate lowers the effective interest rate paid on loans) because both the income and substitution effects enforce each other, while the effect of future consumption is ambiguous. 5. Ricardian equivalence is based on the assumption that both households and government must satisfy their respective budget constraints in the sense ultimately having to pay back debt with future income or future tax revenues. Given other conditions, this assumption implies that lump sum taxes and government debt are equivalent in the following sense: suppose that taxes rise (and the government debt falls), holding the present value of government spending constant (an important assumption). Households will respond to this increase by reducing saving dollar for dollar to offset the reduction in debt, knowing that future taxes will fall. Households are thus able to maintain their original consumption path. In other words, fiscal policy that changes the timing of taxes and thus debt, has no effect on household decisions. Other assumptions that must be satisfied: infinite lifetime or bequest motive, perfect capital markets, lump sum taxes, no overlapping generations. 6. The immigration wave causes the capital per effective worker k = K/AL to fall immediately (it jumps discretely to the left). Because nothing else changes (recall the assumption that labor continues to grow at rate n), the new level of capital per effective worker is smaller in the 4

5 short-run than its steady-state value. Therefore, the rate of capital accumulation exceeds the rate at which it is deteriorating (due to depreciation, labor growth and technology growth). The capital stock will thus rise in the short-run. Eventually, given diminishing returns to capital, capital per effective worker will approach its original steady-state value. Output per effective worker will follow the same pattern as capital per effective worker. But note that in the new steady-state, even though k and y are the same as before the immigration wave, both the overall capital stock and output will have grown proportionally to the rise in the labor force. 7. Optimal growth. Λ = β t c1 θ t 1 θ + λ t [kt α k t+1 + (1 δ)k t c t ] Take derivatives with respect to c t and k t+1 and eliminate λ to get β( c t ) θ = [αkt+1 α 1 + (1 δ)] 1 c t+1 If the capital stock is too big relative to its steady-state, then consumption must jump discretely to the saddlepath, since this path is the only one that satisfies the Euler equation above and the transversality condition. Because this point on the saddlepath must lie above the constantcapital locus and to the right of the constant-consumption locus, the capital stock will begin to fall over time, and consumption will gradually fall as well. Ultimately, the system will approach its steady-state where both the capital stock and consumption are lower than the initial values. 8. AK model. a. This equation is simply the Euler equation from the representative agents dynamic optimization problem, in which the agent maximizes lifetime utility subject to his or her capital accumulation constraint and the production technology (think of this problem as one of a central planner). The distinguishing feature of the model is that the marginal product of capital does not diminish; there are constant returns to capital. g then becomes the endogenous growth rate of consumption that satisfies the tangency condition implied by the Euler equation. That is, consumption must grow at rate g so that the marginal benefit of increasing current consumption just equals the discounted marginal cost of decreasing future consumption, given technology and preferences. b. A decrease in i tends to raise steady-state growth (more patience allows capital to accumulate faster), while a decline in the marginal product of capital decreases growth (this reduces the return to saving and thus accumulating capital). Thus, the effect on growth will depend on the relative magnitudes of the change in each parameter. 5

The Ramsey Model. Lectures 11 to 14. Topics in Macroeconomics. November 10, 11, 24 & 25, 2008

The Ramsey Model. Lectures 11 to 14. Topics in Macroeconomics. November 10, 11, 24 & 25, 2008 The Ramsey Model Lectures 11 to 14 Topics in Macroeconomics November 10, 11, 24 & 25, 2008 Lecture 11, 12, 13 & 14 1/50 Topics in Macroeconomics The Ramsey Model: Introduction 2 Main Ingredients Neoclassical

More information

Final Exam II ECON 4310, Fall 2014

Final Exam II ECON 4310, Fall 2014 Final Exam II ECON 4310, Fall 2014 1. Do not write with pencil, please use a ball-pen instead. 2. Please answer in English. Solutions without traceable outlines, as well as those with unreadable outlines

More information

Ramsey s Growth Model (Solution Ex. 2.1 (f) and (g))

Ramsey s Growth Model (Solution Ex. 2.1 (f) and (g)) Problem Set 2: Ramsey s Growth Model (Solution Ex. 2.1 (f) and (g)) Exercise 2.1: An infinite horizon problem with perfect foresight In this exercise we will study at a discrete-time version of Ramsey

More information

Final Exam II (Solutions) ECON 4310, Fall 2014

Final Exam II (Solutions) ECON 4310, Fall 2014 Final Exam II (Solutions) ECON 4310, Fall 2014 1. Do not write with pencil, please use a ball-pen instead. 2. Please answer in English. Solutions without traceable outlines, as well as those with unreadable

More information

Final Exam Solutions

Final Exam Solutions 14.06 Macroeconomics Spring 2003 Final Exam Solutions Part A (True, false or uncertain) 1. Because more capital allows more output to be produced, it is always better for a country to have more capital

More information

(Incomplete) summary of the course so far

(Incomplete) summary of the course so far (Incomplete) summary of the course so far Lecture 9a, ECON 4310 Tord Krogh September 16, 2013 Tord Krogh () ECON 4310 September 16, 2013 1 / 31 Main topics This semester we will go through: Ramsey (check)

More information

Government Debt, the Real Interest Rate, Growth and External Balance in a Small Open Economy

Government Debt, the Real Interest Rate, Growth and External Balance in a Small Open Economy Government Debt, the Real Interest Rate, Growth and External Balance in a Small Open Economy George Alogoskoufis* Athens University of Economics and Business September 2012 Abstract This paper examines

More information

Final Exam (Solutions) ECON 4310, Fall 2014

Final Exam (Solutions) ECON 4310, Fall 2014 Final Exam (Solutions) ECON 4310, Fall 2014 1. Do not write with pencil, please use a ball-pen instead. 2. Please answer in English. Solutions without traceable outlines, as well as those with unreadable

More information

Chapter 3 The Representative Household Model

Chapter 3 The Representative Household Model George Alogoskoufis, Dynamic Macroeconomics, 2016 Chapter 3 The Representative Household Model The representative household model is a dynamic general equilibrium model, based on the assumption that the

More information

Lecture 3 Growth Model with Endogenous Savings: Ramsey-Cass-Koopmans Model

Lecture 3 Growth Model with Endogenous Savings: Ramsey-Cass-Koopmans Model Lecture 3 Growth Model with Endogenous Savings: Ramsey-Cass-Koopmans Model Rahul Giri Contact Address: Centro de Investigacion Economica, Instituto Tecnologico Autonomo de Mexico (ITAM). E-mail: rahul.giri@itam.mx

More information

UNIVERSITY OF OSLO DEPARTMENT OF ECONOMICS

UNIVERSITY OF OSLO DEPARTMENT OF ECONOMICS UNIVERSITY OF OSLO DEPARTMENT OF ECONOMICS Postponed exam: ECON4310 Macroeconomic Theory Date of exam: Wednesday, January 11, 2017 Time for exam: 09:00 a.m. 12:00 noon The problem set covers 13 pages (incl.

More information

Chapter 5 Fiscal Policy and Economic Growth

Chapter 5 Fiscal Policy and Economic Growth George Alogoskoufis, Dynamic Macroeconomic Theory, 2015 Chapter 5 Fiscal Policy and Economic Growth In this chapter we introduce the government into the exogenous growth models we have analyzed so far.

More information

Chapter 9 Dynamic Models of Investment

Chapter 9 Dynamic Models of Investment George Alogoskoufis, Dynamic Macroeconomic Theory, 2015 Chapter 9 Dynamic Models of Investment In this chapter we present the main neoclassical model of investment, under convex adjustment costs. This

More information

Part A: Answer Question A1 (required) and Question A2 or A3 (choice).

Part A: Answer Question A1 (required) and Question A2 or A3 (choice). Ph.D. Core Exam -- Macroeconomics 13 August 2018 -- 8:00 am to 3:00 pm Part A: Answer Question A1 (required) and Question A2 or A3 (choice). A1 (required): Short-Run Stabilization Policy and Economic Shocks

More information

1 A tax on capital income in a neoclassical growth model

1 A tax on capital income in a neoclassical growth model 1 A tax on capital income in a neoclassical growth model We look at a standard neoclassical growth model. The representative consumer maximizes U = β t u(c t ) (1) t=0 where c t is consumption in period

More information

Savings, Investment and the Real Interest Rate in an Endogenous Growth Model

Savings, Investment and the Real Interest Rate in an Endogenous Growth Model Savings, Investment and the Real Interest Rate in an Endogenous Growth Model George Alogoskoufis* Athens University of Economics and Business October 2012 Abstract This paper compares the predictions of

More information

Dynamic Macroeconomics

Dynamic Macroeconomics Chapter 1 Introduction Dynamic Macroeconomics Prof. George Alogoskoufis Fletcher School, Tufts University and Athens University of Economics and Business 1.1 The Nature and Evolution of Macroeconomics

More information

Final Exam - Economics 101 (Fall 2009) You will have 120 minutes to complete this exam. There are 105 points and 7 pages

Final Exam - Economics 101 (Fall 2009) You will have 120 minutes to complete this exam. There are 105 points and 7 pages Name Student ID Section day and time Final Exam - Economics 101 (Fall 2009) You will have 120 minutes to complete this exam. There are 105 points and 7 pages Multiple Choice: (20 points total, 2 points

More information

AK and reduced-form AK models. Consumption taxation. Distributive politics

AK and reduced-form AK models. Consumption taxation. Distributive politics Chapter 11 AK and reduced-form AK models. Consumption taxation. Distributive politics The simplest model featuring fully-endogenous exponential per capita growth is what is known as the AK model. Jones

More information

AK and reduced-form AK models. Consumption taxation.

AK and reduced-form AK models. Consumption taxation. Chapter 11 AK and reduced-form AK models. Consumption taxation. In his Chapter 11 Acemoglu discusses simple fully-endogenous growth models in the form of Ramsey-style AK and reduced-form AK models, respectively.

More information

Midterm Exam. Monday, March hour, 30 minutes. Name:

Midterm Exam. Monday, March hour, 30 minutes. Name: San Francisco State University Michael Bar ECON 702 Spring 2019 Midterm Exam Monday, March 18 1 hour, 30 minutes Name: Instructions 1. This is closed book, closed notes exam. 2. No calculators of any kind

More information

Midterm 2 Review. ECON 30020: Intermediate Macroeconomics Professor Sims University of Notre Dame, Spring 2018

Midterm 2 Review. ECON 30020: Intermediate Macroeconomics Professor Sims University of Notre Dame, Spring 2018 Midterm 2 Review ECON 30020: Intermediate Macroeconomics Professor Sims University of Notre Dame, Spring 2018 The second midterm will take place on Thursday, March 29. In terms of the order of coverage,

More information

Notes II: Consumption-Saving Decisions, Ricardian Equivalence, and Fiscal Policy. Julio Garín Intermediate Macroeconomics Fall 2018

Notes II: Consumption-Saving Decisions, Ricardian Equivalence, and Fiscal Policy. Julio Garín Intermediate Macroeconomics Fall 2018 Notes II: Consumption-Saving Decisions, Ricardian Equivalence, and Fiscal Policy Julio Garín Intermediate Macroeconomics Fall 2018 Introduction Intermediate Macroeconomics Consumption/Saving, Ricardian

More information

Part A: Answer question A1 (required), plus either question A2 or A3.

Part A: Answer question A1 (required), plus either question A2 or A3. Ph.D. Core Exam -- Macroeconomics 15 August 2016 -- 8:00 am to 3:00 pm Part A: Answer question A1 (required), plus either question A2 or A3. A1 (required): Macroeconomic Effects of Brexit In the wake of

More information

9. Real business cycles in a two period economy

9. Real business cycles in a two period economy 9. Real business cycles in a two period economy Index: 9. Real business cycles in a two period economy... 9. Introduction... 9. The Representative Agent Two Period Production Economy... 9.. The representative

More information

ECON 3020: ACCELERATED MACROECONOMICS. Question 1: Inflation Expectations and Real Money Demand (20 points)

ECON 3020: ACCELERATED MACROECONOMICS. Question 1: Inflation Expectations and Real Money Demand (20 points) ECON 3020: ACCELERATED MACROECONOMICS SOLUTIONS TO PRELIMINARY EXAM 03/05/2015 Instructor: Karel Mertens Question 1: Inflation Expectations and Real Money Demand (20 points) Suppose that the real money

More information

Chapter 6. Endogenous Growth I: AK, H, and G

Chapter 6. Endogenous Growth I: AK, H, and G Chapter 6 Endogenous Growth I: AK, H, and G 195 6.1 The Simple AK Model Economic Growth: Lecture Notes 6.1.1 Pareto Allocations Total output in the economy is given by Y t = F (K t, L t ) = AK t, where

More information

Intertemporal choice: Consumption and Savings

Intertemporal choice: Consumption and Savings Econ 20200 - Elements of Economics Analysis 3 (Honors Macroeconomics) Lecturer: Chanont (Big) Banternghansa TA: Jonathan J. Adams Spring 2013 Introduction Intertemporal choice: Consumption and Savings

More information

UNIVERSITY OF OSLO DEPARTMENT OF ECONOMICS

UNIVERSITY OF OSLO DEPARTMENT OF ECONOMICS UNIVERSITY OF OSLO DEPARTMENT OF ECONOMICS Postponed exam: ECON4310 Macroeconomic Theory Date of exam: Monday, December 14, 2015 Time for exam: 09:00 a.m. 12:00 noon The problem set covers 13 pages (incl.

More information

GRA 6639 Topics in Macroeconomics

GRA 6639 Topics in Macroeconomics Lecture 9 Spring 2012 An Intertemporal Approach to the Current Account Drago Bergholt (Drago.Bergholt@bi.no) Department of Economics INTRODUCTION Our goals for these two lectures (9 & 11): - Establish

More information

Overlapping Generations Model: Dynamic Efficiency and Social Security

Overlapping Generations Model: Dynamic Efficiency and Social Security Overlapping Generations Model: Dynamic Efficiency and Social Security Prof. Lutz Hendricks Econ720 August 23, 2017 1 / 28 Issues The OLG model can have inefficient equilibria. We solve the problem of a

More information

Part A: Answer Question A1 (required) and Question A2 or A3 (choice).

Part A: Answer Question A1 (required) and Question A2 or A3 (choice). Ph.D. Core Exam -- Macroeconomics 10 January 2018 -- 8:00 am to 3:00 pm Part A: Answer Question A1 (required) and Question A2 or A3 (choice). A1 (required): Cutting Taxes Under the 2017 US Tax Cut and

More information

Graduate Macro Theory II: Fiscal Policy in the RBC Model

Graduate Macro Theory II: Fiscal Policy in the RBC Model Graduate Macro Theory II: Fiscal Policy in the RBC Model Eric Sims University of otre Dame Spring 7 Introduction This set of notes studies fiscal policy in the RBC model. Fiscal policy refers to government

More information

ADVANCED MACROECONOMICS I

ADVANCED MACROECONOMICS I Professor Oliver Landmann Retake Exam Advanced Macroeconomics I July 2 nd, 2015 ADVANCED MACROECONOMICS I Retake Exam - July 2 nd, 2015 l. Short Questions (1 point each) Mark the following statements as

More information

Equilibrium with Production and Endogenous Labor Supply

Equilibrium with Production and Endogenous Labor Supply Equilibrium with Production and Endogenous Labor Supply ECON 30020: Intermediate Macroeconomics Prof. Eric Sims University of Notre Dame Spring 2018 1 / 21 Readings GLS Chapter 11 2 / 21 Production and

More information

Equilibrium with Production and Labor Supply

Equilibrium with Production and Labor Supply Equilibrium with Production and Labor Supply ECON 30020: Intermediate Macroeconomics Prof. Eric Sims University of Notre Dame Fall 2016 1 / 20 Production and Labor Supply We continue working with a two

More information

Eco504 Spring 2010 C. Sims MID-TERM EXAM. (1) (45 minutes) Consider a model in which a representative agent has the objective. B t 1.

Eco504 Spring 2010 C. Sims MID-TERM EXAM. (1) (45 minutes) Consider a model in which a representative agent has the objective. B t 1. Eco504 Spring 2010 C. Sims MID-TERM EXAM (1) (45 minutes) Consider a model in which a representative agent has the objective function max C,K,B t=0 β t C1 γ t 1 γ and faces the constraints at each period

More information

1 Ricardian Neutrality of Fiscal Policy

1 Ricardian Neutrality of Fiscal Policy 1 Ricardian Neutrality of Fiscal Policy We start our analysis of fiscal policy by stating a neutrality result for fiscal policy which is due to David Ricardo (1817), and whose formal illustration is due

More information

Growth Theory: Review

Growth Theory: Review Growth Theory: Review Lecture 1, Endogenous Growth Economic Policy in Development 2, Part 2 March 2009 Lecture 1, Endogenous Growth 1/28 Economic Policy in Development 2, Part 2 Outline Review: From Solow

More information

Economics II/Intermediate Macroeconomics (No. 5025) Prof. Dr. Gerhard Schwödiauer/ Prof. Dr. Joachim Weimann. Semester: Summer Semester 2003

Economics II/Intermediate Macroeconomics (No. 5025) Prof. Dr. Gerhard Schwödiauer/ Prof. Dr. Joachim Weimann. Semester: Summer Semester 2003 Matr.-Nr. Name: Examination Examiners: Economics II/Intermediate Macroeconomics (No. 5025) Prof. Dr. Gerhard Schwödiauer/ Prof. Dr. Joachim Weimann Semester: Summer Semester 2003 The following aids may

More information

Comprehensive Exam. August 19, 2013

Comprehensive Exam. August 19, 2013 Comprehensive Exam August 19, 2013 You have a total of 180 minutes to complete the exam. If a question seems ambiguous, state why, sharpen it up and answer the sharpened-up question. Good luck! 1 1 Menu

More information

1 Dynamic programming

1 Dynamic programming 1 Dynamic programming A country has just discovered a natural resource which yields an income per period R measured in terms of traded goods. The cost of exploitation is negligible. The government wants

More information

Real Business Cycle Theory

Real Business Cycle Theory Real Business Cycle Theory Paul Scanlon November 29, 2010 1 Introduction The emphasis here is on technology/tfp shocks, and the associated supply-side responses. As the term suggests, all the shocks are

More information

General Examination in Macroeconomic Theory. Fall 2010

General Examination in Macroeconomic Theory. Fall 2010 HARVARD UNIVERSITY DEPARTMENT OF ECONOMICS General Examination in Macroeconomic Theory Fall 2010 ----------------------------------------------------------------------------------------------------------------

More information

Incentives and economic growth

Incentives and economic growth Econ 307 Lecture 8 Incentives and economic growth Up to now we have abstracted away from most of the incentives that agents face in determining economic growth (expect for the determination of technology

More information

I. The Solow model. Dynamic Macroeconomic Analysis. Universidad Autónoma de Madrid. September 2015

I. The Solow model. Dynamic Macroeconomic Analysis. Universidad Autónoma de Madrid. September 2015 I. The Solow model Dynamic Macroeconomic Analysis Universidad Autónoma de Madrid September 2015 Dynamic Macroeconomic Analysis (UAM) I. The Solow model September 2015 1 / 43 Objectives In this first lecture

More information

Part I (45 points; Mark your answers in a SCANTRON)

Part I (45 points; Mark your answers in a SCANTRON) Final Examination Name: ECON 4020/ SPRING 2005 Instructor: Dr. M. Nirei 1:30 3:20 pm, April 28, 2005 Part I (45 points; Mark your answers in a SCANTRON) (1) The GDP deflator is equal to: a. the ratio of

More information

Mathematical Economics dr Wioletta Nowak. Lecture 1

Mathematical Economics dr Wioletta Nowak. Lecture 1 Mathematical Economics dr Wioletta Nowak Lecture 1 Syllabus Mathematical Theory of Demand Utility Maximization Problem Expenditure Minimization Problem Mathematical Theory of Production Profit Maximization

More information

Microeconomic Foundations of Incomplete Price Adjustment

Microeconomic Foundations of Incomplete Price Adjustment Chapter 6 Microeconomic Foundations of Incomplete Price Adjustment In Romer s IS/MP/IA model, we assume prices/inflation adjust imperfectly when output changes. Empirically, there is a negative relationship

More information

Chapter 2 Savings, Investment and Economic Growth

Chapter 2 Savings, Investment and Economic Growth George Alogoskoufis, Dynamic Macroeconomic Theory Chapter 2 Savings, Investment and Economic Growth The analysis of why some countries have achieved a high and rising standard of living, while others have

More information

Consumption and Savings (Continued)

Consumption and Savings (Continued) Consumption and Savings (Continued) Lecture 9 Topics in Macroeconomics November 5, 2007 Lecture 9 1/16 Topics in Macroeconomics The Solow Model and Savings Behaviour Today: Consumption and Savings Solow

More information

SDP Macroeconomics Final exam, 2014 Professor Ricardo Reis

SDP Macroeconomics Final exam, 2014 Professor Ricardo Reis SDP Macroeconomics Final exam, 2014 Professor Ricardo Reis Answer each question in three or four sentences and perhaps one equation or graph. Remember that the explanation determines the grade. 1. Question

More information

Chapter 10 THE PARTIAL EQUILIBRIUM COMPETITIVE MODEL. Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved.

Chapter 10 THE PARTIAL EQUILIBRIUM COMPETITIVE MODEL. Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved. Chapter 10 THE PARTIAL EQUILIBRIUM COMPETITIVE MODEL Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved. 1 Market Demand Assume that there are only two goods (x and y)

More information

Eco504 Fall 2010 C. Sims CAPITAL TAXES

Eco504 Fall 2010 C. Sims CAPITAL TAXES Eco504 Fall 2010 C. Sims CAPITAL TAXES 1. REVIEW: SMALL TAXES SMALL DEADWEIGHT LOSS Static analysis suggests that deadweight loss from taxation at rate τ is 0(τ 2 ) that is, that for small tax rates the

More information

ECO 4933 Topics in Theory

ECO 4933 Topics in Theory ECO 4933 Topics in Theory Introduction to Economic Growth Fall 2015 Chapter 2 1 Chapter 2 The Solow Growth Model Chapter 2 2 Assumptions: 1. The world consists of countries that produce and consume only

More information

1. Suppose that instead of a lump sum tax the government introduced a proportional income tax such that:

1. Suppose that instead of a lump sum tax the government introduced a proportional income tax such that: hapter Review Questions. Suppose that instead of a lump sum tax the government introduced a proportional income tax such that: T = t where t is the marginal tax rate. a. What is the new relationship between

More information

Macroeconomics 2. Lecture 5 - Money February. Sciences Po

Macroeconomics 2. Lecture 5 - Money February. Sciences Po Macroeconomics 2 Lecture 5 - Money Zsófia L. Bárány Sciences Po 2014 February A brief history of money in macro 1. 1. Hume: money has a wealth effect more money increase in aggregate demand Y 2. Friedman

More information

Macroeconomics I, UPF Professor Antonio Ciccone SOLUTIONS PROBLEM SET 1

Macroeconomics I, UPF Professor Antonio Ciccone SOLUTIONS PROBLEM SET 1 Macroeconomics I, UPF Professor Antonio Ciccone SOLUTIONS PROBLEM SET 1 1.1 (from Romer Advanced Macroeconomics Chapter 1) Basic properties of growth rates which will be used over and over again. Use the

More information

SOLUTIONS PROBLEM SET 5

SOLUTIONS PROBLEM SET 5 Macroeconomics I, UPF Professor Antonio Ciccone SOLUTIONS PROBLEM SET 5 The Solow AK model with transitional dynamics Consider the following Solow economy production is determined by Y = F (K; L) = AK

More information

Mathematical Economics Dr Wioletta Nowak, room 205 C

Mathematical Economics Dr Wioletta Nowak, room 205 C Mathematical Economics Dr Wioletta Nowak, room 205 C Monday 11.15 am 1.15 pm wnowak@prawo.uni.wroc.pl http://prawo.uni.wroc.pl/user/12141/students-resources Syllabus Mathematical Theory of Demand Utility

More information

004: Macroeconomic Theory

004: Macroeconomic Theory 004: Macroeconomic Theory Lecture 14 Mausumi Das Lecture Notes, DSE October 21, 2014 Das (Lecture Notes, DSE) Macro October 21, 2014 1 / 20 Theories of Economic Growth We now move on to a different dynamics

More information

ECON 6022B Problem Set 1 Suggested Solutions Fall 2011

ECON 6022B Problem Set 1 Suggested Solutions Fall 2011 ECON 6022B Problem Set Suggested Solutions Fall 20 September 5, 20 Shocking the Solow Model Consider the basic Solow model in Lecture 2. Suppose the economy stays at its steady state in Period 0 and there

More information

Problem Set #2. Intermediate Macroeconomics 101 Due 20/8/12

Problem Set #2. Intermediate Macroeconomics 101 Due 20/8/12 Problem Set #2 Intermediate Macroeconomics 101 Due 20/8/12 Question 1. (Ch3. Q9) The paradox of saving revisited You should be able to complete this question without doing any algebra, although you may

More information

Fiscal Policy and Economic Growth

Fiscal Policy and Economic Growth Chapter 5 Fiscal Policy and Economic Growth In this chapter we introduce the government into the exogenous growth models we have analyzed so far. We first introduce and discuss the intertemporal budget

More information

Y t )+υ t. +φ ( Y t. Y t ) Y t. α ( r t. + ρ +θ π ( π t. + ρ

Y t )+υ t. +φ ( Y t. Y t ) Y t. α ( r t. + ρ +θ π ( π t. + ρ Macroeconomics ECON 2204 Prof. Murphy Problem Set 6 Answers Chapter 15 #1, 3, 4, 6, 7, 8, and 9 (on pages 462-63) 1. The five equations that make up the dynamic aggregate demand aggregate supply model

More information

Eco504 Spring 2010 C. Sims FINAL EXAM. β t 1 2 φτ2 t subject to (1)

Eco504 Spring 2010 C. Sims FINAL EXAM. β t 1 2 φτ2 t subject to (1) Eco54 Spring 21 C. Sims FINAL EXAM There are three questions that will be equally weighted in grading. Since you may find some questions take longer to answer than others, and partial credit will be given

More information

Econ 522: Intermediate Macroeconomics, Fall 2017 Chapter 3 Classical Model Practice Problems

Econ 522: Intermediate Macroeconomics, Fall 2017 Chapter 3 Classical Model Practice Problems Econ 522: Intermediate Macroeconomics, Fall 2017 Chapter 3 Classical Model Practice Problems 1. Explain what determines the amount of output an economy produces? The factors of production and the available

More information

Part A: Answer Question A1 (required) and Question A2 or A3 (choice).

Part A: Answer Question A1 (required) and Question A2 or A3 (choice). Ph.D. Core Exam -- Macroeconomics 7 January 2019 -- 8:00 am to 3:00 pm Part A: Answer Question A1 (required) and Question A2 or A3 (choice). A1 (required): Short-Run Stabilization Policy and Economic Shocks

More information

E&G, Ch. 1: Theory of Choice; Utility Analysis - Certainty

E&G, Ch. 1: Theory of Choice; Utility Analysis - Certainty 1 E&G, Ch. 1: Theory of Choice; Utility Analysis - Certainty I. Summary: All decision problems involve: 1) determining the alternatives available the Opportunities Locus. 2) selecting criteria for choosing

More information

1 No capital mobility

1 No capital mobility University of British Columbia Department of Economics, International Finance (Econ 556) Prof. Amartya Lahiri Handout #7 1 1 No capital mobility In the previous lecture we studied the frictionless environment

More information

Problem 1 / 20 Problem 2 / 30 Problem 3 / 25 Problem 4 / 25

Problem 1 / 20 Problem 2 / 30 Problem 3 / 25 Problem 4 / 25 Department of Applied Economics Johns Hopkins University Economics 60 Macroeconomic Theory and Policy Midterm Exam Suggested Solutions Professor Sanjay Chugh Fall 00 NAME: The Exam has a total of four

More information

The Real Business Cycle Model

The Real Business Cycle Model The Real Business Cycle Model Economics 3307 - Intermediate Macroeconomics Aaron Hedlund Baylor University Fall 2013 Econ 3307 (Baylor University) The Real Business Cycle Model Fall 2013 1 / 23 Business

More information

Chapter 10 Solutions

Chapter 10 Solutions Foundations of International Macroeconomics 1 Workbook 2 Maurice Obstfeld, Kenneth Rogoff, and Gita Gopinath Chapter 10 Solutions 1. (a) With a positive steady-state gross money supply growth rate of 1

More information

Dynamic AD and Dynamic AS

Dynamic AD and Dynamic AS Dynamic AD and Dynamic AS Pedro Serôdio July 21, 2016 Inadequacy of the IS curve The IS curve remains Keynesian in nature. It is static and not explicitly microfounded. An alternative, microfounded, Dynamic

More information

004: Macroeconomic Theory

004: Macroeconomic Theory 004: Macroeconomic Theory Lecture 16 Mausumi Das Lecture Notes, DSE October 28, 2014 Das (Lecture Notes, DSE) Macro October 28, 2014 1 / 24 Solow Model: Golden Rule & Dynamic Ineffi ciency In the last

More information

Ch.3 Growth and Accumulation. Production function and constant return to scale

Ch.3 Growth and Accumulation. Production function and constant return to scale 1 Econ 30 Intermediate Macroeconomics Chul-Woo Kwon Ch.3 Growth and Accumulation I. Introduction A. Growth accounting and source of economic growth B. The neoclassical growth model: the Simple Solow growth

More information

STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics. Ph. D. Preliminary Examination: Macroeconomics Fall, 2009

STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics. Ph. D. Preliminary Examination: Macroeconomics Fall, 2009 STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics Ph. D. Preliminary Examination: Macroeconomics Fall, 2009 Instructions: Read the questions carefully and make sure to show your work. You

More information

Topic 4. Introducing investment (and saving) decisions

Topic 4. Introducing investment (and saving) decisions 14.452. Topic 4. Introducing investment (and saving) decisions Olivier Blanchard April 27 Nr. 1 1. Motivation In the benchmark model (and the RBC extension), there was a clear consump tion/saving decision.

More information

K and L by the factor z magnifies output produced by the factor z. Define

K and L by the factor z magnifies output produced by the factor z. Define Intermediate Macroeconomic Theory II, Fall 2014 Instructor: Dmytro Hryshko Solutions to Problem Set 1 1. (15 points) Let the economy s production function be Y = 5K 1/2 (EL) 1/2. Households save 40% of

More information

Answers to Problem Set #6 Chapter 14 problems

Answers to Problem Set #6 Chapter 14 problems Answers to Problem Set #6 Chapter 14 problems 1. The five equations that make up the dynamic aggregate demand aggregate supply model can be manipulated to derive long-run values for the variables. In this

More information

Queen s University Faculty of Arts and Science Department of Economics ECON 222 Macroeconomic Theory I Fall Term 2012

Queen s University Faculty of Arts and Science Department of Economics ECON 222 Macroeconomic Theory I Fall Term 2012 Queen s University Faculty of Arts and Science Department of Economics ECON 222 Macroeconomic Theory I Fall Term 2012 Sections 001 and 002 Instructors: Margaux MacDonald (001), Robert McKeown (002) Final

More information

EconS 301 Intermediate Microeconomics Review Session #5

EconS 301 Intermediate Microeconomics Review Session #5 EconS 30 Intermediate Microeconomics Review Session #5 Exercise You might think that when a production function has a diminishing marginal rate of technical substitution of labor for capital it cannot

More information

I. The Solow model. Dynamic Macroeconomic Analysis. Universidad Autónoma de Madrid. Autumn 2014

I. The Solow model. Dynamic Macroeconomic Analysis. Universidad Autónoma de Madrid. Autumn 2014 I. The Solow model Dynamic Macroeconomic Analysis Universidad Autónoma de Madrid Autumn 2014 Dynamic Macroeconomic Analysis (UAM) I. The Solow model Autumn 2014 1 / 38 Objectives In this first lecture

More information

14.02 Quiz 3. Time Allowed: 90 minutes. Fall 2012

14.02 Quiz 3. Time Allowed: 90 minutes. Fall 2012 14.02 Quiz 3 Time Allowed: 90 minutes Fall 2012 NAME: MIT ID: FRIDAY RECITATION: FRIDAY RECITATION TA: This quiz has a total of 3 parts/questions. The first part has 13 multiple choice questions where

More information

I. The Solow model. Dynamic Macroeconomic Analysis. Universidad Autónoma de Madrid. Autumn 2014

I. The Solow model. Dynamic Macroeconomic Analysis. Universidad Autónoma de Madrid. Autumn 2014 I. The Solow model Dynamic Macroeconomic Analysis Universidad Autónoma de Madrid Autumn 2014 Dynamic Macroeconomic Analysis (UAM) I. The Solow model Autumn 2014 1 / 33 Objectives In this first lecture

More information

Part 1: Short answer, 60 points possible Part 2: Analytical problems, 40 points possible

Part 1: Short answer, 60 points possible Part 2: Analytical problems, 40 points possible Midterm #1 ECON 322, Prof. DeBacker September 25, 2018 INSTRUCTIONS: Please read each question below carefully and respond to the questions in the space provided (use the back of pages if necessary). You

More information

The Solow Growth Model. Martin Ellison, Hilary Term 2017

The Solow Growth Model. Martin Ellison, Hilary Term 2017 The Solow Growth Model Martin Ellison, Hilary Term 2017 Solow growth model 2 Builds on the production model by adding a theory of capital accumulation Was developed in the mid-1950s by Robert Solow of

More information

Macroeconomics Qualifying Examination

Macroeconomics Qualifying Examination Macroeconomics Qualifying Examination January 211 Department of Economics UNC Chapel Hill Instructions: This examination consists of three questions. Answer all questions. Answering only two questions

More information

Econ 323 Microeconomic Theory. Practice Exam 1 with Solutions

Econ 323 Microeconomic Theory. Practice Exam 1 with Solutions Econ 323 Microeconomic Theory Practice Exam 1 with Solutions Chapter 2, Question 1 The equilibrium price in a market is the price where: a. supply equals demand b. no surpluses or shortages result c. no

More information

Econ 323 Microeconomic Theory. Chapter 2, Question 1

Econ 323 Microeconomic Theory. Chapter 2, Question 1 Econ 323 Microeconomic Theory Practice Exam 1 with Solutions Chapter 2, Question 1 The equilibrium price in a market is the price where: a. supply equals demand b. no surpluses or shortages result c. no

More information

Introduction to economic growth (2)

Introduction to economic growth (2) Introduction to economic growth (2) EKN 325 Manoel Bittencourt University of Pretoria M Bittencourt (University of Pretoria) EKN 325 1 / 49 Introduction Solow (1956), "A Contribution to the Theory of Economic

More information

Chapter 22. Modern Business Cycle Theory

Chapter 22. Modern Business Cycle Theory Chapter 22 Modern Business Cycle Theory Preview To examine the two modern business cycle theories the real business cycle model and the new Keynesian model and compare them with earlier Keynesian models

More information

Labor Economics Field Exam Spring 2011

Labor Economics Field Exam Spring 2011 Labor Economics Field Exam Spring 2011 Instructions You have 4 hours to complete this exam. This is a closed book examination. No written materials are allowed. You can use a calculator. THE EXAM IS COMPOSED

More information

Chapter 7 Externalities, Human Capital and Endogenous Growth

Chapter 7 Externalities, Human Capital and Endogenous Growth George Alogoskoufis, Dynamic Macroeconomics, 2016 Chapter 7 Externalities, Human Capital and Endogenous Growth In this chapter we examine growth models in which the efficiency of labor is no longer entirely

More information

1 Ricardian Neutrality of Fiscal Policy

1 Ricardian Neutrality of Fiscal Policy 1 Ricardian Neutrality of Fiscal Policy For a long time, when economists thought about the effect of government debt on aggregate output, they focused on the so called crowding-out effect. To simplify

More information

Macroeconomic Theory I: Growth Theory

Macroeconomic Theory I: Growth Theory Macroeconomic Theory I: Growth Theory Gavin Cameron Lady Margaret Hall Michaelmas Term 2004 macroeconomic theory course These lectures introduce macroeconomic models that have microfoundations. This provides

More information

The Theory of the Firm

The Theory of the Firm The Theory of the Firm I. Introduction: A Schematic Comparison of the Neoclassical Approaches to the Studies Between the Theories of the Consumer and the Firm A. The Theory of Consumer Choice: Consumer

More information

Macroeconomics Lecture 2: The Solow Growth Model with Technical Progress

Macroeconomics Lecture 2: The Solow Growth Model with Technical Progress Macroeconomics Lecture 2: The Solow Growth Model with Technical Progress Richard G. Pierse 1 Introduction In last week s lecture we considered the basic Solow-Swan growth model (Solow (1956), Swan (1956)).

More information

Econ 633/733: Advanced Microeconomics Final Exam, Autumn 2004 Professor Kosteas

Econ 633/733: Advanced Microeconomics Final Exam, Autumn 2004 Professor Kosteas Econ 633/733: Advanced Microeconomics Final Exam, Autumn 004 Professor Kosteas Name: Instructions: You will be assigned a number. Write this number in the top right corner of every page. Do not write your

More information

Introduction The Story of Macroeconomics. September 2011

Introduction The Story of Macroeconomics. September 2011 Introduction The Story of Macroeconomics September 2011 Keynes General Theory (1936) regards volatile expectations as the main source of economic fluctuations. animal spirits (shifts in expectations) econ

More information