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L5 - The Life-cycle Model Chapters 2 and 3 textbook 2...

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The Life-cycle Model Chapters 2 and 3, textbook 2 Describe the model Market clearing prices The individual lifetime budget constraint and utility maximization Derive the transitional equation 1
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Features of the model The model is built on ingredients introduced in previous studies. Here we make the description of the model complete: Who act in the economy? What are their preferences? What do they know? How do they produce? How do they interact? 2
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Completeness of the model permits general equilibrium analysis: People maximize their preferences. Markets are cleared. In particular, saving is endogenous so the model provides a better understanding to the growth theory; illustrates some key points of the real business cycle theory; permits serious discussion of important fiscal policy such as social security. 3
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The Basic Setup of the Model At the start of each period, there are N (identical) persons born.
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