Macroeconomics Chapter 11
How many of the following business cycle facts can be explained if the primary cause of business cycles is temporary changes in total factor productivity: procyclical consumption, procyclical investment, procyclical employment, and procyclical real wages?
4
In the real intertemporal model with investment, there is intertemporal substitution with respect to
Consumption and Leisure
When drawn against the current wage, the current labor supply shifts to the right if
Current tax increases
In the real intertemporal model with investment (FIRMS)
Firms max PV profits
MRS1,'C' = w ', describes the representative consumer's
Future period work - leisure decision
If firm-level asymmetric information becomes more severe, then
Investment demand decreases
Labour demand depends on the interest rate because
Labour demand DOES NOT depend on r
When drawn against current income, the slope of the Cd (r) + Id (r) + G curve is equal to the marginal
MPC
An increase in lifetime wealth
decrease current labor supply and increase current consumption demand.
An increase in credit market frictions
decreases investment demand.
For the firm in the real intertemporal model with investment
depreciate is constant
When drawn against the current real wage, the labor demand curve is
downward sloping because the marginal product of labor declines with the quantity of labor employed.
In determining the benefit of additional investment to the representative firm, we consider the marginal product of
future capital
When drawn against the real interest rate, the output supply curve is upward sloping because labor supply is
increasing in the real interest rate and labor demand is independent of the real interest rate.
If future total factor productivity increases
investment demand increases
Firms discount future profits at the interest rate r because
it is the same rate for households
Output supply is increasing in the interest rate because
labor supply is increasing in the interest rate.
The total government expenditure multiplier is less than one because
labor supply reacts to interest rate changes and consumption demand is affected by taxes.
MPC out of income
less than 1
Next period's capital is equal to current-period investment
plus the amount of current capital left over after depreciation. K' = I + (1-d)K
The intertemporal substitution of leisure effect is used to justify the assumption that current labor supply increases when the
real interest rate increases.
In the real intertemporal model, an adverse sectoral shock acts to
reduce real output and increase the real interest rate.
A temporary increase in government spending that leads to only a small decline in lifetime wealth likely shifts the output demand curve to the
right by more than the rightward shift in output supply.
In the real intertemporal model, an adverse sectoral shock acts to
shift the labor demand and labor supply curves to the left.
The assumption that current-period labor supply is positively related to the current-period real wage is justified as long as the
substitution effect dominates the income effect in the short run.
In general equilibrium
supply = demand for all goods in all periods
At the end of the future period, in the real intertemporal model with investment
the firm can convert capital one-for-one into consumption goods.
When drawn against the current real wage, the labor demand curve shift to the right if
total factor productivity increases.
A consumer may increase savings by..
working more hours and consuming fewer goods in the present period.
When drawn against the real interest rate, output supply increases if
z increases
When drawn against the real interest rate, the optimal investment schedule shifts to the right if
z' increases
When drawn against the real interest rate, the output demand curve shifts to the right when
z' increases
The response of output following a natural disaster includes
an increase in output demand and a decrease in output supply.
The equilibrium effects of a temporary increase in total factor productivity include
an increase in the real wage and a decrease in the real interest rate.
In response to a temporary increase in government spending, the representative consumer consumes
consume less and take less leisure
In the real intertemporal model with investment
consumers make choices over current consumption and leisure, and future consumption and leisure.
MRSC,C' = 1 + r, describes the representative consumer's
consumption - savings decision.
When drawn against the real interest rate, the output demand curve unambiguously shifts to the right if
current capital decreases.
When drawn against the real interest rate, output supply increases if
current capital increases
When drawn against the real interest rate, the optimal investment schedule shifts to the right if the
current capital stock K decreases.
When drawn against the real interest rate, output demand increases if
current government spending increases
When drawn against the real interest rate, the output supply curve unambiguously shifts to the right if
current or future tax increases
MRS1,C = w, describes the representative consumer's
current period work - leisure decision
The marginal benefit from investment for a firm is equal to
.MPk + I - d / (1+r)
The total multiplier of government expenditure is
0 <x< 1
The marginal cost of investment for the firm is equal to
1
If the interest rate goes up, what happens to the investment demand curve?
Decreases
In the real intertemporal model, if future total factor productivity increases, this captures the effects of
New shocks
When drawn against the real interest rate, the output demand curve unambiguously shifts to the right if either or both of the following occur.
a decrease in current taxes and a decrease in future taxes
Any increase in the present value of taxes for the consumer implies
a decrease in lifetime wealth and an increase in current labor supply.
Any increase in the present value of taxes implies
a decrease in lifetime wealth and an increase in the current labor supply.
The equilibrium effects of a prospective future increase in total factor productivity include
a decrease in the real wage and an increase in the real interest rate.
The equilibrium effects of a temporary increase in government spending include
a decrease in the real wage and an increase in the real interest rate.
What could result in an increase of consumption demand and a decrease in labor supply?
a drop in current taxes