Important notes from Exam and Assignments Flashcards
Explain time inconsistency
Optimal decisions across time ae inconsistent with eachother. An optimal choice made today about the future will be inconsistent with the optimal choice when the future becomes present.
Explain general equilibrium
All agents and firms optimalize given prizes. Market prizes are so that all markets are in equilibrium, all marets clear.
Briefly explain the life-time utility function and paramters θ and β.
Life-time utility is additively separable across the two periods. Utility in period 2 is discounted with β - representing a time preference (patience). Period utility function is iso-elastic - with the intertemporal elasticity of substitution being 1/θ. IES explain at which rate consumers wish to trade consumption in period 1 with consumption in period 2.
Why is the income effect not relevant regarding changes in the interest rate when we look at the aggregate economy?
There is no net saving or borrowing since the aggregate economy is assumed to be a closed economy.
Empirically the link between investment and Tobin’s q is not always strong. Why?
- Intangible capital
- Market bubbles increasing the market value of installed capital
What is the optimal level of consumption given the golden rule?
MPK = capital depreciation rate
What is the ain difference between the Solow model and the Neoclassical model(Ramsey model)?
In the Solow model savings rate is given exogenously, while in the Ramsey model housholds maximize their present value of utility subject to a capital accumulation function.
What are the main properties of business cycles?
- A cycle consist of expansions occuring at about the same time in many economic activities, followed by similarly general recessions.
- Sequences of changes are reccurrent not periodic
- Duration of BC from one year up to 11/12 yeard
- Not divisible into shorter cycles of similar character with amplitude approximating their own
Good leading indicators are characterized by which four abilities?
- Leading
- Timeliness, the indicator has to be availible quickly
- Stable, indicator not recalculated each month
- Correlation with GDP
A good indicator check at least 3/4
How does labour supply and relative wages behave in the case of productivity shocks following the Neoclassical model of consumption/investment?
Relative wages and labour supply are procyclical with temporary shicks, and acyclical with permanent shocks
Why do we use IP as a proxy to measure GDP?
It takes long time to calculate GDP, often 3-4 months.
IP is easier to calculate, thus being availible earlier.
This is important because it provides more recent data to analyze.
Why do we transform many macroeconomic and financial series taking natural logarithm?
- Generally transform series in levels to ease comparability and reducenumerical problems; variables that are rates or shares are usually not transformed.
- Taking natural logs transforms multiplicative/exponential relations to log-linear
- Changes in logged variables are approx. growth rate of variables.
- Partialderivatived lny/dlnx can be interpreted as elasticity
What does the Euler equation imply?
At optimum consumers equate discounted marginal utility of consumption to a rate of which they can transfer resources over time.
What is the difference between LCH and PIH?
In LCH consumers are thought to have a finite lifetime. In PIH the relation between generations works to imply that consumers have an infinite lifetime.
Which assumption imply that investment does not react to changes in current productivity?
Time to build assumption.
This assumption says that it takes 1 period for capital to be productive.
