Lecture_7_February 23

Lecture_7_February 23 - LOGISTICS Problem Set 1 posted on...

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February 23, 2010 1 L OGISTICS Problem Set 1 posted on web Due Thursday March 4, 2010 Due at 11AM, NOT 2 PM Covers material from Chapters 3, 4, and 7 Each student must submit own independently-written solutions Practice Problem Set 3 Solutions posted on web Practice Problem Set 4 next week Today: Finish Chapters 3 and 4 Consumption-Saving Model Today: Start Chapter 7 Government Behavior Thursday, February 25 Continue Chapter 7 Next week: Start Chapter 8
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February 23, 2010 2 M AKING U P S NOW W EEK Provost has posted various options. Consistent with this, we will do the following: 1. Later in term, I will write and place on ELMS two extra lectures You are required to read them and hand in a problem set similar to the practice problem sets (and see point 2) 2. Of the remaining practice problem sets, 2 must be handed in. One must be the above problem set Your choice of the other one They will be graded. Numerical grade will not affect your course grade, but they are a requirement for taking the final As with the problem sets that affect your grade, you may work in groups, but each person must submit independently graded solutions
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February 23, 2010 3 I N THE N EWS Current Economic Events News Supplement 5 on the State of Macroeconomics An essay by Paul Krugman, the 2008 Nobel-Prize recipient in Economic Science, linking the problems of the financial crisis to problems of macroeconomic models Sometime after Spring Break, we will discuss the evolution of macroeconomics, with the aim of better understanding alternative approaches. A link to “rap” on some of this material is found in the introduction to the News Supplement
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C ONSUMPTION- S AVINGS M ODEL (REVIEW AND CONCLUSION) F EBRUARY 23, 2010
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February 23, 2010 5 L IFETIME B UDGET C ONSTRAINT A PPROACH Consumption-Savings Model: Sequential Formulation Maximize utility u ( c 1 , c 2 ) Subject to lifetime budget constraint in nominal terms in real terms Single multiplier λ on lifetime budget constraint Alternative approach use sequential budget constraints to derive saving function 2 2 2 1 1 1 11 P c Y Pc Y ii 22 cy rr
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February 23, 2010 6 L AGRANGE A NALYSIS: S EQUENTIAL A PPROACH Consumption-Savings Model: Sequential Formulation Sequential formulation highlights the role of net wealth ( A 1 ) between period 1 and period 2 Accords better with the explicit timing of economic events than the lifetime approach… …but yields the same result Advantage: allows us to think about interaction between asset prices and macroeconomic events (intersection of finance theory and macro theory in Chapter 8) Apply Lagrange tools to consumption savings optimization Objective function: u ( c 1 , c 2 ) Constraint s : Period 1 budget constraint: Period 2 budget constraint: Sequential Lagrange formulation requires two multipliers
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Lecture_7_February 23 - LOGISTICS Problem Set 1 posted on...

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