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PART SEVEN MICROECONOMIC FOUNDATIONS OF MACROECONOMICS
Response of Employment and Wages to Changes in Labor Demand
and Labor Supply
3. Using the graphic representation of the labor
market, analyz
THE EFFECTS OF MACROECONOMIC SHOCKS ON ASSET PRICES
9
rise in the denominator of Equation 1 are thus likely to be much larger than was the case
for the temporary supply shock because the effects are l
CHAPTER 18 CONSUMPTION AND SAVING
477
have a reasonably low discount rate and should not discount the future too heavily,
when they make decisions they just cant help themselves and instead seek insta
CHAPTER 18 CONSUMPTION AND SAVING
461
2. Indifference curves slope down. Consider points W and X in Figure 18.2.
Since they sit on the same indifference curve IC1, both points make
Carmencita equally
CHAPTER 18 CONSUMPTION AND SAVING
459
then choose C1 = W + Y1 = $50,000 + $10,000 = $60,000. From Equation 2, C2 will
be as follows:
C2 = (1 + .04)(0) + $52,000 = $52,000
We plot the combination of C2
458
PART SEVEN MICROECONOMIC FOUNDATIONS OF MACROECONOMICS
If Carmencita plans to spend C1 in the first period, we can determine her consumption in the second period, C2. Shell have her initial wealth
CHAPTER 18 CONSUMPTION AND SAVING
475
red shaded area in panel (a) of Figure 18.8. But now every year her wealth is going
down by this amount, which is shown in panel (b), until at the end of her life
CHAPTER 18 CONSUMPTION AND SAVING
473
where,
v = [1> (L - T)]
(10)
c = [(R - T)> (L - T)]
(11)
The life-cycle hypothesis comes to a conclusion that we already saw from our analysis
of intertemporal ch
CHAPTER 19 INVESTMENT
503
From House Prices to Residential Investment
The residential investment IH curve in panel (b) of Figure 19.7 shows the relationship
between the relative price of housing and t
5 04
PART SEVEN MICROECONOMIC FOUNDATIONS OF MACROECONOMICS
rented, then the landlord earns the rent from the renter over the life of the house, and so
the houses market valuation is the expected disc
CHAPTER 19 INVESTMENT
501
2. A rise in the real interest rate or a rise in the effective tax rate, which increase
the user cost of capital, lower q and therefore cause investment to fall.
3. A higher
5 02
PART SEVEN MICROECONOMIC FOUNDATIONS OF MACROECONOMICS
what Tobins q theory predicts. With soaring stock prices, Tobins q rose to very high levels,
and U.S. companies found that any new technolog
CHAPTER 19 INVESTMENT
505
income is higher, or if an increase in the number of households that will want housing bids up rent. The analysis in Figure 19.8 therefore produces the following result:
high
5 08
PART SEVEN MICROECONOMIC FOUNDATIONS OF MACROECONOMICS
Housing Prices and
Residential
Investment,
20012009
From 2001 to 2006,
housing starts rose
from around 1.5 million to a peak of
over 2 milli
CHAPTER 19 INVESTMENT
509
appreciation of housing prices, lowering the user cost of housing and stimulating demand.
The result is depicted in panel (a) of Figure 19.10: demand for housing increased, t
CHAPTER 19 INVESTMENT
4. Discuss the effect of the investment tax credit
made by the Obama administration on February
2009 on the level of investment in the United
States. What does empirical evidence
4 60
PART SEVEN MICROECONOMIC FOUNDATIONS OF MACROECONOMICS
other words, we can describe the intertemporal budget constraint in Equation 3
as follows:
Present value of consumption = present value of l
CHAPTER 18 CONSUMPTION AND SAVING
465
When the interest rate rises to r2, however, the slope of the budget line becomes
more negative at - (1 + r2) , so the IBL2 intertemporal budget line becomes stee
4 78
PART SEVEN MICROECONOMIC FOUNDATIONS OF MACROECONOMICS
The Obama administration has taken these ideas from behavioral economics
to heart by adding provisions to the 2009 economic stimulus package
4 74
PART SEVEN MICROECONOMIC FOUNDATIONS OF MACROECONOMICS
Now lets look at what happens to saving and wealth over time. For the first fortyfive years of her life, Carmencita is saving Y - C = Y - 0.
4 68
PART SEVEN MICROECONOMIC FOUNDATIONS OF MACROECONOMICS
income they earn in that period. That is, after optimizing, it is no longer true that the
marginal rate of substitution equals one plus the
4 76
PART SEVEN MICROECONOMIC FOUNDATIONS OF MACROECONOMICS
The reasoning behind the random walk hypothesis starts with three steps.
1. The life-cycle and permanent income hypotheses (as well the theo
CHAPTER 18 CONSUMPTION AND SAVING
463
both periods. Indeed, because the real interest rate is unchanged, the slope of the
intertemporal budget line remains the same and so it shifts to the right in a
4 64
PART SEVEN MICROECONOMIC FOUNDATIONS OF MACROECONOMICS
Consumption Smoothing
Our analysis of consumption and wealth reveals two important facts.
1. Consumption rises when the present value of lif
CHAPTER 17 EXCHANGE RATES AND INTERNATIONAL ECONOMIC POLICY
447
To Peg or Not to Peg
Fixed exchange rate regimes have a long history. They can take the form of fixing the
value of the domestic currenc
CHAPTER 17 EXCHANGE RATES AND INTERNATIONAL ECONOMIC POLICY
449
Nonetheless, exchange-rate pegging is highly dangerous for these countries,
because it leaves them open to speculative attacks that can
CHAPTER 17 EXCHANGE RATES AND INTERNATIONAL ECONOMIC POLICY
451
REVIEW QUESTIONS
All questions are available in
at www.myeconlab.com.
Foreign Exchange Market and Exchange Rates
1. What is the foreign
4 48
PART SIX MACROECONOMIC POLICY
A striking example of these problems occurred when Germany reunified in 1990. In
response to concerns about inflationary pressures arising from reunification and the
4 52
PART SIX MACROECONOMIC POLICY
Exchange Rates in the Long Run
2. A Starbucks coffee sells for 10 yuan in Beijing,
China, and for $2 in Chicago.
a) Calculate the nominal exchange rate if the
law of
18
Consumption and Saving
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