fluctuations in productivity

Question 1

what are the 2 goods?

Answer 1

1. consumption
2. leisure

Question 2

what are the 3 agents?

Answer 2

1. consumer
2. firm
3. government

Question 3

what do consumers do? (5)

Answer 3

1. get utility from consumption & leisure
2. supplies labor in exchange for wages
3. gets dividends from firms
4. pay taxes
5. spend income on consumption

Question 4

Sp (variable)

Answer 4

saved disposable income from first period that’s not consumed

Question 5

consumer’s current budget constraint equation

Answer 5

C + Sp = w(h - l) + π - T

Question 6

consumer’s future budget constraint equation

Answer 6

C’ = w’(h - l’) + π’ - T’ + (1+r)Sp

Question 7

lifetime budget constraint equation is made up of…?

Answer 7

C + C’/(1+r)

Question 8

problem of the consumer is to…?

Answer 8

choose C, C’, S, Ns, Ns’ to maximize the Utility while satisfying the LTBC

Question 9

LTBC

Answer 9

lifetime budget constraint

Question 10

CURRENT period optimization condition

Answer 10

MRS(l,C) = w

Question 11

FUTURE period optimization condition

Answer 11

MRS(l′,C′) = w′

Question 12

INTEMPORAL period optimization condition

Answer 12

MRS(C,C′) = 1 + r

Question 13

how does current labor supply change with real wage?

Answer 13

current labor supply increases with the real wage

Question 14

how does labor supply change with increase in real interest rate?

Answer 14

labor supply INCREASES with an INCREASE in the real interest rate

substitution effect (current vs future leisure

Question 15

how does labor supply change with an increase in lifetime wealth (e.g. taxes fall)?

Answer 15

increase in lifetime wealth reduces labor supply

Question 16

Cd (variable)

Answer 16

demand for consumption goods in the current period

depends on the interest rate

Question 17

marginal propensity to consume (MPC)

Answer 17

proportion of increase in income that consumer is likely to spend on consumption (goods and services) rather than save

Question 18

how does the firm maximize profits? (2)

Answer 18

1. hiring labor in the current and future period
2. investing in new capital during the current period to increase production capacity in the future period

Question 19

marginal cost of investment

Answer 19

as the firm gives up one unit of current profits for each unit it invests

MC(I) = 1

Question 20

marginal benefit of investment

Answer 20

marginal product of future capital plus the quantity of capital that will be left in the future after depreciation, all discounted back to the present

MB(I) = [1/(1+r)][MPk’ + 1 - d]

Question 21

optimal investment rule for the firm

Answer 21

MC = MB

MPk’ - d = r

Question 22

quantities (6)

Answer 22

1. C/C’
2. S
3. Ns/Nd; Ns’/Nd’
4. I
5. Y/Y’
6. T/T’

Question 23

prices (2)

Answer 23

1. w/w’
2. r

Question 24

relationship between consumption and the interest rate?

Answer 24

negative, inverse

Question 25

relationship between investment and the interest rate?

Answer 25

negative, inverse

Question 26

effects of an increase in government spending (6)

Answer 26

1. output ↑
2. real interest rate ↑
3. real wage ↓
4. consumption ↓
5. investment ↓
6. employment ↑