Assignment 4 - EC7210

Question 1

När vi har den där C = [integral osv osc], vad betyder det?

Answer 1

It tells us that the aggregate consumption index is given by the CES aggregator over the different varieties of consumption goods in the economy.

the index increases with the level of diversity of goods consumed. We say that the household has a ”love for variety”.

Question 2

När vi har Pi = η/(η-1)w

Betyder det och hur påverkas det av olika värden på η?

Där η är demand elasticity.

Answer 2

The optimal price is set as a constant mark-up over the nominal wage.

A higher demand elasticity η means that the demand is more sensitive to the price. In this case, a firm will lose a lot of demand if charging a high price. Equivalently, a higher η means that the substitutability between goods is high which increases price competition and results in a lower mark-up.

Question 3

Vilken kurva är detta och vad säger den?

yt = yt+1 - (1/θ)rt

Answer 3

New-Keynesian IS-curve. It captures the demand side of the economy since we derive it from the Euler equation describing how the optimal trade off between consumption today and consumption tomorrow depend on the real interest rate. A higher real interest rate means that consumption today is more expensive relative to consumption tomorrow. This leads to a reduction in consumption today and therefore also aggregate output today.

How sensitive output is to a change in the real interest rate depends on the intertemporal elasticity of substitution (1/θ) > 1.
A high elasticity of substitution means that
consumption today and consumption tomorrow are close substitutes.

Question 4

Vad visar den här ekvationen?

πt = κyt + βEtπt+1

Answer 4

Det är den Ny Keynsianska Phillipskurvan, vilken bestämmer inflationen i ekonomin.

Question 5

Vilka tre ekvationer är med i den nykeynsianska modellen och vad bestämmer de?

Answer 5

IS-kurvan som bestämmer efterfrågan och beror på den kommande produktionen realräntan.
Describes how the optimal trade off between consumption today and consumption tomorrow depends on the real interest rate..

Den nykeynsianska phillipskurvan som bestämmer inflationen och beror på produktionen och inflationsförväntningarna.

Sedan stängs ekonomin av hur centralbankerna bestämmer den nominella räntan (it).

With sticky prices, the evolution of real output cannot be determined independently
of monetary policy.