chap 5

Question 1

exogenous variables

Answer 1

The variables are outside the model

Question 2

endogenous variable

Answer 2

the variables are determine by the model itself

Question 3

government budget constraint

Answer 3

G = T

Question 4

Income- expenditure identity

Answer 4

Y = C + G

Y = C + I + G +NX

C = wNs + (profit symbol) - T (NX=0, I = 0 )***

C = wNs + y - wNd - G ( profit = Y - wNd , t = g)

C = Y* - G

Question 5

production possibility frontier (PPF)

Answer 5

is the technological relationship between C and I

Question 6

Equilibrium effects of an increase in government spending

Answer 6

An increase in G spending shifts the PPF down by the amount of the increase in G

Question 7

Firm max profit given technology

Answer 7

Profit = z F (k,Nd) - wNd

Question 8

Optimal :

Answer 8

A CE is Pareto optimal if there is no way to re-arrange production or re-allocate goods (c,l) s.t someone is made better off without making someone worse off

Question 9

Fundamentals welfare terms

Answer 9

1. first welfare term says that under certain circumstance a CE is Pareto optimal
2. second welfare theorem sas that under certain circumstance PO EQ is a CE

CE = competitive Equilibrium

Question 10

SE and IE

Answer 10

temporary shock ——-> SE dominates

permanent shock ——-> IE dominates

Question 11

Back Pareto Optimality (what break P.O EQ)

Answer 11

1. (eq =/ ce ) when there is a market failure (unemployment) or if there is an externaility
2. (externality) a CE is not P.O if taxes distort the actions decision makers (proportional taxes,not lump sum)
3. A CE is not P.O if firms are not price takers (violating P.O condition)

Question 12

Optimization problem of Representative consumer (formula)

Answer 12

MRS l,c = w (1- t)

Question 13

Optimization of Representative firm

Answer 13

MPn = w

Question 14

Endogenous Variables

Answer 14

w —> Real wage

L —->consumption

N —->employment

Y —–> output

Question 15

Exogenous variables

Answer 15

Z —-> production

T —–> taxes (lump sum taxes)

G ——> government spending ***

K —-> capital ***

Question 16

business cycle facts (pro-cycle or anti) (CHECK(

N
C
W
I
Z

Answer 16

N = pro-cycle

C = pro cyclical

W =