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slides01 - (Introduction)-P.1 Econ 594SA: Organization...

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Unformatted text preview: (Introduction)-P.1 Econ 594SA: Organization Class Page: www.econ.ucsb.edu/~bohn/Summer/SummerMacro.html- Information is updated throughout the quarter. - Check for announcements. Class page announcements are assumed known. Open door policy for graduate students. - Official office hours: MW 2:30-3:30. NH3016. E-mail: bohn@econ.ucsb.edu . Put Econ 594 in the subject line. Grading for Part I: two problem sets, plus midterm exam. (Introduction)-P.2 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 594SA Part I Introduction: Intertemporal choice problems. - Tools: Constrained optimization. Graphical analysis. (Known already?) The Solow Model : The Mechanics of Economic Growth. - Tools: Differential equations. Comparative statics. Linear approximations. Optimal Growth : Consumption and savings/investment choices over time. - Tools: Optimal control. Systems of differential equations. Phase diagrams. - Applications to Fiscal Policy. - If time: Application to money. (Introduction)-P.3 Intertemporal Choice: Consumption Individual decision problem: - Given a series of wage incomes t w . G iven real interest rate r (assume 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 setting with graphical analysis. Then generalize. - Consumption now (c 1 ) vs. consumption later (c 2 ). - Assume given initial wealth A = (1 + r ) a . Budget equations imply an intertemporal budget constraint (IBC) : - use 1 1 1 1 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 = : => ] [ 2 2 1 1 1 c w a r = + => ] [ 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. (Introduction)-P.4 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....
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slides01 - (Introduction)-P.1 Econ 594SA: Organization...

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