term 2- lecture 1: consumption and saving Flashcards
what is the model of the economy?
the economy is populated by large number of agents who live infinite periods
single perishable good per date - the consumption good, the price P_t of good at time t assumed to be P for all periods in simple. all individuals have identical income streams with income at time t equaling y_t
what are the prefferences of the individuals in the model of the economy?
what is the purpose of the individual?
the purpose of the individual is to maximise their lifetime utility by choosing {c_t} between infinity and 0 years.
what allows for consumption smoothening over time in a market with a perishable good?
the introduction of a credit market will allow for individuals to move resources over time through consumption smoothning
what is the model of the credit market?
credit market operates at every date t with a date t private bond traded in these markets which are one period maturitys. a bond which costs £1 will receive 1+ R_(t+1) at date t+1 therefore it is the nominal gross rate of return . b_t represents bond holding at time t.
what is the formula for the total amount of resources availiable to an individual at time t?
what is the budget constraint at date t?
what is the individuals maximisation problem ?
if the R_t is constant over time, what may the infinite budget constraints be replaced with?
what is the lagrangian function for the maximisation problem with infinite periods?
what is the euler equation for the infinite periods maximisation problem?
how is the utility function affected by the introduction of labor?
what do individuals have to smoothen over time when income is not exogenous?
the individuals have to smooth both consumption and labor
what are the tradeoffs the individual faces for the labor and comsumption infinite period model?
what is the euler equation for consumption in the infinite period model with labor?
what is the Euler equation for labor in the infinite period model with labor?
what is the intra-temporal optimisation condition in the infinite period model with labor?
what are the assumptions for the model of job search which includes friction?
large number of identical workers who live forever. at date t some of these workers are employed and some unemployed
each unemployed worker gets a wage offer at beginning of period t in form of real wage w. employed workers dont receive offers
if you accept the offer, you work at same wage rate until you lose job. if you reject, you get chance of new offer but have to wait until next period. wage offers are randomly drawn from wage distribution betweeen 0 and w^(-). F(w) is cdf and f(w) is pdf. if worker rejects offer they recieve unemployment benefit θ. job seperation is exogenous and occurs with a probability δ. those hit with a shock become unemployed the next period
what does the V_u mean?
it denotes the value of staying unemployed and equals the lifetime utility of an unemployed person given that this person behaves optimally for the rest of their life
what does the V_e(w) denote?
it denotes the value of accepting a wage offer w. it equals a lifetime utility of an employed person with a wage rate w given that this person behaves optimally for the rest of their lfie
what is the optimal behaviour of an individual in the job search model?
the optimal behaviour will be to accept a job whenever the value of accepting a wage offer V_e(w) is greater than the value of staying unemployed V_u
what is the equation for V_u?
u() - period utility
β ∈ (0, 1)
what is the equation for V_e(w)?
u() - period utility
β ∈ (0, 1)
assuming B= 1/(1+p), what is the equation for V_e(w) in terms of V_u?
what does optimal behaviour suggest about the wages of the worker?
at the steady state, what is the equation for employed?
what occurs to the unemployment rate when their is an increase in unemployment benefits- answer in relation to the equation?
what are the timing of events in the job search model??
