Lecture 21 General Equilibrium

Lecture 21 General Equilibrium - Eco320L Spring 2010,...

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Eco320L Spring 2010, Professor Beatrix Paal updated 10/11/2010 10:04 AM Lecture 20: Business Cycle Facts 1/8 Lecture 21 General Equilibrium Last time Business cycle facts ( Chapters 8.1, 8.2, and 8.3 ) Today general equilibrium ( Chapter 9.4 ) Next time 1 Outline of the IS/LM/FE model Graphical representation of the three markets one main figure (the “general equilibrium graph”) and some auxiliary figures general equilibrium graph: – the equilibrium of each of the three markets is represented by a curve: labor market: FE line (FE b/c full employment) goods market: IS curve (IS b/c I=S) money market: LM curve (LM: “liquidity preference”, money supply) Y r market labor : FE market asset : LM market goods : IS r Y
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Eco320L Spring 2010, Professor Beatrix Paal updated 10/11/2010 10:04 AM Lecture 20: Business Cycle Facts 2/8 Goals and limitations The IS/LM/FE model allows us to study How general equilibrium is achieved in the classical and the Keynesian model Different theories of what causes business cycles How economic policy works in equilibrium Dynamics is important, and this framework captures some, but not all of it we explicitly model the consumption/saving choice as dynamic we model fiscal policy explicitly in a dynamic setting (include the complete implications of the government’s intertemporal budget constraint) later we extend the labor leisure choice to a dynamic setting ( r labor supply) BUT: we ignore capital accumulation (today’s investment tomorrow’s capital tomorrow’s income today’s labor/leisure and consumption/saving choice) similarly, we ignore short-term inflation expectations (tomorrow’s income tomorrow’s money demand tomorrow’s price level today’s inflation expectations) we ignore autocorrelation of technology shocks
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This note was uploaded on 10/25/2010 for the course ECO 320L taught by Professor Kendrick during the Fall '10 term at University of Texas at Austin.

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Lecture 21 General Equilibrium - Eco320L Spring 2010,...

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