notes 6

notes 6 - EC202 Fall 09 Lecture Notes 6 Gabriele Gratton...

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Lecture Notes 6 Gabriele Gratton September 29, 2009 1 Introduction In the past weeks we have been discussing a series of topics: intertemporal choice, long run growth, labor market and the relevance of money and inter- national trade. While immediately interested in studying each of these topics per se one after the other, we have built, step after step, an entire theoretic model of an economy. In other words, we have now an entire theory of the relations between the great forces of macroeconomics and we have analyzed (though each time somewhat only partially) its equilibrium. We have indeed a complete macroeconomic theory, one which goes under the name of Neoclassic Macroeconomics. Now that we have a complete theory of macroeconomics, it is time to wonder what of this theory we might consider satisfactory as an explanation of the functioning of the economy and what instead we feel should be changed. Before doing so it is necessary to put all the pieces together and analyzing how the entire model works. 2 The agents in the neoclassic macroeconomic model The model we have studied in the past weeks has three agents ± or types of agents: households, ²rms and the government. Households Households in our model are the only owner of the mean of production, i.e. the time available to them for productive activities, Labor , and the goods produced, not consumed and used as tools in the production of other goods, Capital . It is relevant to notice that in the real world households do not own directly the capital used to produce other goods, they (we) merely own ²nancial assets such as shares and bonds, the value of which is the value of the capital used by the ²rms which have emitted the shares and the bonds in order to ²nance their capital investments. This simpli²cation, though clearly 1
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not completely neutral, allow us to cancel out all the intermediary subjects in much of the functioning of the economic system. Households in our model care only about their consumption of goods, ser- vices and spare time ( Leisure ) throughout all their lives and possibly their prole±s. All they do is choosing the optimal mix of consumption and leisure in di/erent periods given the relative prices they face: the real wage and the real interest rate . It is important to notice that the absolute level of prices (the CPI) does not enter in their decisions since all they care about are relative prices of leisure and consumption, and consumption today and tomorrow. In particular, if there is no uncertainty about in²ation in the future, their lives are completely in the real sphere of economics and nominal variables have no importance for them. When uncertainty about in²ation plays a role, all that can happen is that ex post (i.e. when all decisions have already been taken) some are going to receive a Christmas present and some are going to loose their wallet in a well. For any combination of relative prices of consumption today and tomorrow
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notes 6 - EC202 Fall 09 Lecture Notes 6 Gabriele Gratton...

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