lecture1 - Lecture 1 Introduction to Modern Macroeconomics...

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Lecture 1 Introduction to Modern Macroeconomics
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ECN/APEC 7240 I - 2 Per Capita GNP
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ECN/APEC 7240 I - 3 Income-Expenditure Identity Y = C + I + G = zF ( K , N ) C = C ( K , Y ) K ´ = I + (1 - δ ) K Key question: What are F and C ? F is determined by technology. C is determined by behavior. K G N K zF K C N K zF ) 1 ( )) , ( , ( ) , ( δ - + - - =
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ECN/APEC 7240 I - 4 Lucas Critique Prior to the 70s, economists often assumed phenomenological behavioral functions. They posed a functional form for C ( K , Y ) and estimated its parameters. Policymakers then used these behavioral functions to set optimal policy. Lucas argued against this because the consumption function should depend on the policy.
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ECN/APEC 7240 I - 5 Tax Example Suppose that C = a + m ( Y - T ). m [0, 1] is the marginal propensity to consume . If the government decreases T , this will lead to higher output and consumption. The Keynesian multiplier: This ignores crowding out effects. . 1 m m T Y - - =
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ECN/APEC 7240 I - 6 Lucas’ Prescription Build models with sound microfoundations. Do not estimate consumer’s choice functions. Estimate the parameters of the model that determines their choices. For example, assume consumers are rational and estimate their utility function.
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ECN/APEC 7240 I - 7 One-Asset Saving Problem Suppose consumers maximize subject to the sequence of budget constraints • Both R t and y t may be stochastic. = 0 0 ) ~ ( t t t c u E β . 1 t t t t t b R y b c + = + +
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ECN/APEC 7240 I - 8 Structural Model To complete the model, we must specify u and stochastic processes for R and y . We must also determine how the consumer forms expectations about future R and y . Since expectations are not observable, Lucas
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This note was uploaded on 01/09/2011 for the course ECON 7140 taught by Professor Kutler during the Spring '10 term at Utah Valley University.

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lecture1 - Lecture 1 Introduction to Modern Macroeconomics...

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