MACRO

Question 1

New-Keynesioan IS-curve

Answer 1

ln(Ct​)=ln(Ct+1​)−(1/θ​)(r−ρ)

Question 2

Households smooth consumption if they are utility maximizing

Answer 2

Explanation: In economics, consumption smoothing means that households try to keep their consumption levels steady over time rather than experiencing big ups and downs. If households are maximizing their utility (or satisfaction), they’ll spread out their consumption to avoid periods of too little or too much, thus maximizing long-term well-being.

Question 3

Consumption smoothing requires perfect capital markets

Answer 3

Explanation: For households to perfectly smooth consumption, they need access to reliable borrowing and lending opportunities. In a perfect capital market, households can freely borrow or save at consistent interest rates. This lets them handle income fluctuations by borrowing in low-income periods and saving in high-income periods, keeping consumption steady.

Question 4

Uncertain future incomes do not impact the model outcome with quadratic utility

Answer 4

Explanation: When we assume a quadratic utility function (where satisfaction is a quadratic function of consumption), it simplifies the model. In this case, even if future incomes are uncertain, households’ decisions remain consistent with predictable consumption patterns. This specific utility shape leads to linear responses, making consumption unaffected by income uncertainty under this model setup.

Question 5

Households update consumption over time due to new information

Answer 5

Explanation: In real life, households don’t have perfect information about the future. As new information (e.g., job changes, economic shifts) becomes available, households adjust their consumption plans. This behavior is often modeled as rational expectations, where households use all available information at any time to make consumption choices that maximize their utility.

Question 6

Household Preferences