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?

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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