Consump on might rise or fall because of the weak

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: ed workers in Canada)? 14 •  Real Rental Price –  Predic-on: the real rental price of capital, R/P, will be rela-vely high in booms and rela-vely low in recessions. –  Rental price is difficult to measure for the whole economy given that most capital are not explicitly rent out because they are typically used by their owners. •  Interest Rate –  Predic-on: booms will have a high interest rate, i, whereas recessions will have a low interest rate. –  The paNern of data looks right – procyclical. 15 Temporary Changes in the Technology Level Example: a decrease in A due to a harvest failure or a general strike would be temporary. Suppose that the change in A is temporary. •  If A increases temporarily, real GDP s-ll rises for fixed values of K and L. •  The marginal product of capital, MPK, and the interest rate, i, also rise as before. •  The intertemporal ­subs-tu-on effect from the higher i s-ll mo-vates households to reduce current consump-on, C, and raise current real saving. •  There are some new results about income effects: 16 •  The model predicts that economic boom would feature high real GDP and investment. –  Consump-on might rise or fall, because of the weak income effect; we assume that Ct would rise by, at most, a small amount. Hence, net investment, rises by nearly as much as – or possibly by even more than – real GDP. –  The model therefore predicts that an economic boom would feature high real GDP and investment. •  A recession would have low real GDP and investment. –  Ct would decline by a small amount. •  Thus, if the underlying shocks were purely temporary, the model would not explain the behavior o...
View Full Document

This document was uploaded on 03/17/2014.

Ask a homework question - tutors are online