204A-slides01

# 204A-slides01 - (1.Intro-P.1 Econ 204A Organization Class...

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(1.Intro)-P.1 Econ 204A: Organization • Class Page: www.econ.ucsb.edu/~bohn/204A/204Aindex.html - Information is updated throughout the quarter. - Check for announcements. Class page announcements are assumed known. • Open door policy for graduate students. NH3016. - Official office hours posted on the class pages. • E-mail: . Put “Econ 204A” in the subject line. • Grading: Weekly problem sets, midterm (in class), final exam.

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(1.Intro)-P.2 Introduction to Macroeconomics • Objectives of macroeconomics: To analyze the economy as a whole, to explain economic growth and economic fluctuations , and to assess economic policy . • Outline of Econ 204A: 1. Introduction : Intertemporal choice problems. - Tools: Constrained optimization. Graphical analysis. 2. The Solow Model : The Mechanics of Capital, Production, and Economic Growth. - Tools: Differential equations. Comparative statics. Linear approximations. - If time: Introduction to New Growth. 3. The Ramsey Model : Optimal Consumption and Savings/Investment over Time. - Tools: Optimal control. Systems of differential equations. Phase diagrams. - Applications to Fiscal Policy and to Money. Digression to discrete time. 4. The Diamond model: Modeling Overlapping Generations. - Fiscal policy applications. Dynamic inefficiency. Bequests and Ricardian Neutrality.
(1.Intro)-P.3 Intertemporal Choice: Consumption • Individual decision problem: - Given a series of wage incomes t w . G iven real interest rate r t =r (constant). - Individuals choose consumption c t and asset holdings a t subject to Budget equations: t t t t c w a r a + + = 1 ) 1 ( • Building intuition: Two-period version with graphical analysis. Then generalize. - Consumption now (c 1 ) vs. consumption later (c 2 ). - Assume given initial wealth A = (1 + r ) a 0 . • Budget equations imply an intertemporal budget constraint (IBC) : - use 1 1 1 1 0 1 ) 1 ( c w A c w a r a + = + + = and 2 2 1 2 ) 1 ( c w a r a + + = - impose the terminal condition a 2 = 0 : => ] [ 2 2 1 1 1 c w a r = + => ] [ 0 2 2 1 1 1 1 c w c w A r + + = + => IBC: c 1 + 1 1 + r c 2 = w 1 + 1 1 + r w 2 + A . - Means: Present value of consumption = Present value of income plus initial wealth.

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Two Periods: Graphical Analysis • Budget line has slope –(1+r). Increase in r => steeper slope. Feasible set: Area under the budget line. • Endowment point is (A+w 1 , w 2 ). Higher A, w 1 , w 2 => budget line shifts “out”. c
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204A-slides01 - (1.Intro-P.1 Econ 204A Organization Class...

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