Real intertemporal model with investment Flashcards
Describe the role of households and intertemporal optimality condition
-HH’s save and consume, own the representative firm
-HH’s optimal consumption bundle (both periods) occurs when the lifetime utility function is maximised ST household constraint (PV consumption = PV disposable income).
-Optimal choice is given by: MRScc1 = 1 + r
Describe representative firm
+ evolution of the capital stock(k stock in p2
)
-Representative firms output production is given by a production function which is a function of z, number of hours worked and capital stock.
-K stock in period 2 = capital in period 1 sibject to depriciation + investmetn
K1 = (1 - d)K + I
-Firm aims to maximise the present value of profits:
V = Pi + Pi1/(1+r)
Describe labour demand and labour supply (intertemporal model) + what effects both + equilbirum liyclv,gvyl,jvg.;il
-The firms demand for labour is derived from marginal product of the firm (derived from rep firms prod function) and is negatively related to wage.
-Demand for labour increases with increases in z and K.
-The households supply of labour is a function of the real interest rate, due to intertemporal substitution effect (higher r –> less consumption –> higher savings –> less leisure consumed –> increased lab supply). –Labour supply increases with the real wage (assuming sub effect domiantes income) and interest rate.
-Equilibrium occurs at a point N, w where lab supply = lab demand.
Role of firms in intertemporal model, maximisation and investment decision
-A role of the rep firm in the intertemporal model is to invest in the first period according to the following investment decision.
-The rep firm invests to the point where the Marginal benefit MB from investment equals the marginal cost. (MC of one unit of investment = 1/ unit of profit. )
-This can be written as: MPK1 - d = r
-Real intrest rate represents the opp cost of investment to the firm.
Describe the complete intertemporal model
-The complete intertemporal model with investment describes simultaneous equiblirum of both the labour market and the goods market. Equilibrium within this model, determines real wage, real interest rate, employment and output.
-Shown graphically with Labour market on left, goods market on right.
Describe/proof of how demand and temporary government spending changes 1 for one
-Assume change in demand = triangle
-Triangle = G2-G1 + MPC(G2-G1) + Triangle(MPC)
-Change in demand = ‘chnage in G spending + effect of change in g spending + effect of change in demand’
-Reararagning for change in dmend = G2 - g1
-Therefore finding the demand multiplier by diiding triangle by g2 - g1 we get 1. Therefore showing demand moves one for one with g.
What shifts the Ns curve (labour supply curve)?
-Changes in the real interest rate, labour supply is a increasing function in interest rate.
-Changes in lifetime wealth/consumption, changes in lesiure therefore changes in hours worked. Can be caused by changes in G therefore changes in PV of taxes.
-Example) increase in g, higher PV taxes –> lower life time wealth, intertemporal sub effect, lower consumption on current period of leisure, therefore more hours worked.
What shifts the Yd curve (output demand curve)?
-Changes in investment demand (k changes)
-Changes in G, as g rises/falls one for one with G, use proof.
-Changes in demand for consumption,due to credit frictions (lower demand for consumption could be due to increase in frictions lead to shift in Yd.)
What shifts the Ys curve (output supply curve)?
-Changes in the production function, caused by other effects sure as G, Z and MPL.
-Eg) increase in G –> labour supply through intertemporal sub effect –> higher MPL and shift in prod function –> shift in Ys curve.
What shifts the Nd curve (labour demand curve)?
-Changes in TFP, z and K both shift the Nd curve.
-changes in z and k both effect the marginal product of labour as the Nd curve is derived from this a movement will occur.
-Changes in MPL through z and k changes will shift the production function, therefore shifting the output supply schedule (Ys).
Write/plan answer for the effect of credit market frictions (increase) in real intertemporal model
answers on paper
Plan answer:
-Define model, assumptions of model, role of households and firms (investment decision and profit max).
-Define whats changing within the model, the shock.
-Describe all effects using graph and WHY occuring
-Conclude with results
Write/plan answer for the effect of a decrease in capital stock in real intertemporal model
answers on paper
Plan answer:
-Define model, assumptions of model, role of households and firms (investment decision and profit max).
-Define whats changing within the model, the shock.
-Describe all effects using graph and WHY occuring
-Conclude with results
Write/plan answer for the effect of an increase in z in real intertemporal model
answers on paper
Plan answer:
-Define model, assumptions of model, role of households and firms (investment decision and profit max).
-Define whats changing within the model, the shock.
-Describe all effects using graph and WHY occuring
-Conclude with results
