Exercise1 - llULIJL'IIl:L.l 1 Macroeconomics l a'3‘ if...

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Unformatted text preview: llULIJL'IIl ..:L.l. 1 Macroeconomics l' a; '3‘? if ,.- fConsider the following Friedman's model of consumption: _ P Ct ‘ B Yt + 8t _- 'P Yt " Yt + "t _ ‘ f r‘! I E(et} = Efnt) = 0 p - _ P _ - Cotht, at) — Coth, nt) — Covtntfit] H 0 where Ct is consumption, Yt is current income, Y: is permanent income. and “t is transitory income. When we regress the following inverted equation by the ordinary least square (OLS): Y 11 t a + b Ct + at and consider the inverse of the estimated b {i.e. d = l/b) as the estimator of 3. Compute the value of d in large sample as the function of B, vartct}, varfntJ and var[YE]. x In 195?—58. Israeli citizens received lump—sum, nonrecurring restitution payments from Germany. The aVEraEE_EayfiefitE_EEF'TEETI§_fiE§‘FEE§hTy—Efifial to the average annual income of families. It is estimated that the typical family's consumption expenditure during the year of the windfall rose no more than 20% of the amount received. Ihe_mEas25g_gf_consumptign_expend1tunefi inclndes_puLghasE_Egrgogsumerffigrahlesé_a§ow do you explain this small increase in consump 10D. s e magni u e 20% consistent with the existing theory of consumption? xTable of the next page shows the estimates of OLS regr‘gsaion of: current 0 sumption on current income of EEEEEholds data of different countries. ates, and groups. For an example, .74 of the first row and the last column says that 1% increase in income is associated with .74% increase in consumption in the regression of selected wage—earner families of US in 1888—90. Explain briefly why income elasticity of consumption is higher for wage—earner families than farm families in the US. Also why do you think that the income elasticity of consumption is higher in Sweden, and lower in U? and medium in UK? x Lfdnsider the following two peiii‘ed economy in which all agents are alike and c ooses consumption tat] an abor {at} to maximize the utility U' T .ln [¢1} +iln §1_n1} + B [ 1n [c2] + 1n [l-nzl ] “‘11. b2 : R b1 + [1—11)n1 — Cl' and c2 = R bz,:3}§f;2}n2. whereb is real value 0 bond at the end o£_gerigd_t_1L_and_xt__i_s wage_ tax rateiaand_flai§.gne plus world real in_terest rate on bond_ _Lwhich is taken as giuenahg this country‘ s residents.) Since She unit of labor produces one unit of output- wage rate before tax is one. The government budget constraint per capita isfi g _ g‘ -_‘ = g ' b2 “ R bi. + 31 T1n1’ and 1"2“2 R b2 + 32' where bg t is real value of government bond and gt is government expenditure per capita at date t. (1] Derive the conditions for household's utility maximization for consumption and labor, for a given gross real interest rate and wage tax rates. ____—_——-——-——_————‘-_-'—-—n—.—__ (ii) What would be the effects of wage tax cut [decrease in 11) associated with bond finance [increase in b; and 12}? Discuss_uheihsn_ihe—Rieardtafi equivalence theorem of tax finance and bgnd iénance holds for this economy. fl” CONSISTENCY \VITH BUDGET STUDIES TABLE 1 Relation between Consumption and-Income Based on Budget Data. for Different Countries. Dates. and Groups of Consumer Units __——___—_— A‘Lwoge Marginal Income Aim-age Propensity Propensity Elasticity of Dare C orrrumer Units Income ta Consume to Consume Consumption ._—_.__—..————-—-————-—---—--~ United States (income grim: in dollars) 1. 1888-90 Selected wageearner h... families 682 _ .90 .67 .74 \_ 2. 1901 Selected wage-earner - “‘" .1 normal families 651 .92 .68 .‘15 3. 1911-19 Selected wage-earner families 1.513 .91 98 .86 4. 1935—36 Nonrelief nonfarm families 1.952 .89 .73 .82 5. 194] Urban families 2.865 .92 .79 .8? 6. 1944 Urban families 3,411' .82 .57 .70 ‘1. 19-1? Urban families 3.32.1I .92 .18 .85 8. 1950 Nonfarm families 4.084”) .9! .73 .80 9. 1950 Spending units of one or more persons, urban plus rural 3,220'4 b .92 .75 .82 10. 1935-36 Nonrelieffarrn families 1.259 .87 .5? .65 ' II. 19-11 - Farm families 1.680 .83 .5? .69 Great Britain (income given in pounds sterlirrg) l2. I938—39 Middle-class families with one earner .89 13. 1951—52 Income units of one or more persons. ' ‘ urban plus rural 369 .99 .86 .87 " d“ \ Sweden P’s} (inedmegr'ren in Swedish kronor) 14. 1913 industrial workers ' and low-grade , ern ployees 744 .99 .90 .91 15. 1923 1nd ustrial workers and law-grade employees 1.232 I .00 .96 .96 16. 1923 Middle-class families 2,692 l .00 .92 .92 17. 1933 Industrial workers and low-grade employees 1.236 .98 .911 .95 18. 1933 Middle-class families 2.34] .96 .88 .91 19. 1933 _ Small farmers 577 .95 ‘l 20. 193.1 ,Farm and forestry ’ workers 504 .99 (com. on next page) 41' HH/r’ph fried/Ma... , ,4 7450; i fl, add-“wag”, (Came/{'61: ~. ’ ”if? B'Llr. ...
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