III.A. - Income w s L-- wage income s s PK RK --- net...

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III. A. Households and Markets To simplify things we assume that households also own businesses. So the firms in our model are family businesses, no corporations. This means that households are “consumers” and “producers.” 1. Markets (i) Goods Market ( 29 d d s L K AF Y , = K K C Y d d δ + + = Price of Goods— P (ii) Factor Markets Labor Market s L --supplied by households looking for work d L --demanded by firms looking to maximize profits Price of Labor— W (wage rate) Capital Market s K --supplied by households looking to save d K --demanded by firms looking to maximize profits Price of Capital— R (rental rate—rate of return to owning capital)
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(iii) Bond Market B > 0 purchasing (demanding) bonds supplying credit (lending) B <0 supplying (selling) bonds demanding credit (borrowing) Price of Credit— i (interest rate) 2. Household Budget Constraint (i)
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Unformatted text preview: Income w s L-- wage income s s PK RK --- net rental income = s PY- w d L- d RK-- (economic) profit iB-- Interest Income (ii) Expenditures d PC-- Consumption K P B M + + -- Saving (iii) Budget Constraint (real terms) P K P R P B i L P W K P B M C s s +-+ + = + + + ) ( 3. Equilibrium Assume that the money stock is constant for now =&gt; = M (i) B = 0 (for every dollar borrowed there must be a dollar lent) (ii) -= P R i / (equal rates of return across all assets) (iii) s d L L = (labor market equilibrium) (iv) s d K K = (capital market equilibrium) (v) = (competition forces economic profit to be zero) Note that if (i)-(v) are satisfied then the goods market will be in equilibrium by the budget constraint. (vi) K Y K C-= +...
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This note was uploaded on 02/19/2011 for the course ECON 251 taught by Professor Blanchard during the Spring '08 term at Purdue University-West Lafayette.

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III.A. - Income w s L-- wage income s s PK RK --- net...

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