HOMEWORK: ANALYTICAL EXERCISES FOR CONSUMPTION AND
INVESTMENT
SOLUTIONS
1. Problem One: Savings Supply (10 Pts)
1
Assume that the utility function is given by u(c, cf ) = c + (cf ) .
a Derive the optimal consumption bundle, (c , cf ). What is the marginal
University of Texas at Austin
Department of Economics
Eco 320L: Intermediate Macroeconomics
Midterm Two
This is due Tuesday, March 26 in Class. It will be scored out of 100, but there are 103 points
possible. Good Luck!
1
2
1. Multiple Choice, 5 Points Ea
HOMEWORK: ANALYTICAL EXERCISES FOR CONSUMPTION AND
INVESTMENT
DUE IN CLASS ON MAR. 5
1. Problem One: Savings Supply (10 Pts)
1
Assume that the utility function is given by u(c, cf ) = c + (cf ) .
a Derive the optimal consumption bundle, (c , cf ). What is
University of Texas at Austin
Department of Economics
Eco 320L: Intermediate Macroeconomics
Midterm Two
This is due Tuesday, March 26 in Class. It will be scored out of 100, but there are 103 points
possible. Good Luck!
1
2
1. Multiple Choice, 5 Points Ea
Real Business cycle theory
technology shocks and real business cycle theory (Section 10.1)
Business cycle theories
Questions
Why are there business cycles?
What (if anything) should the government do about them?
Two elements of a business cycle theory
Examples using the IS/LM/FE model
Shock to money demand (e.g. Lehman Brothers collapse)
Tax cuts or increase in government spending
Clinton-Greenspan policy mix
Cutting government deficit (e.g. reduction in G)
Expansionary monetary policy
Lehman Brothers
More on the IS/LM/FE model
the connection between the LM curve and the money market graph (ABC Section
9.3)
monetary expansion
application: fiscal expansion in the base-line classical model
The LM curve classical (review from last time)
2
How do we rep
IS curve
the IS curve (ABC Section 9.2)
application: technology shocks and real business cycle theory
Outline of the IS/LM/FE model
Graphical representation of the three markets
one main figure (the general equilibrium graph) and some auxiliary figures
ge
Business Cycle Facts
outline
terminology about describing business cycle regularities
the US historical record
business cycle facts
expenditure components
labor market variables
nominal variables
What are business cycles?
2
Recurrent fluctuations in aggre
Coverage: Chapters 10 - 12, 14.3 and 17.1 - 17.3. (14.3 covers
Ricardian Equivalence)
MPC marginal propensity to consume
Increase in consumption for each $1 increase in disposable income
Consumption function equation relating consumption to disposable
in
Macro Theory
01/26/2015
Measuring Macroeconomic performance
Market price = current value
GDP - Market value of final goods and services, newly produced during
specific time period within countrys borders
Count FINAL good and services
o Value of car, not
Stylized facts of business cycles
1. Macroeconomic fluctuations are irregular and unpredictable
o no two business cycles look alike
2. Macroeconomic variables tend to fluctuate together
o pro-cyclical variables are positively correlated with real GDP
o
Introduction to the general equilibrium model
FE line
Today
Introduction to the general equilibrium model (ABC Chapter 9)
the FE line
vertical (ABC Section 9.1)
upward-sloping, when labor supply is interest-elastic
Next Time
the IS curve (ABC Section 9.2)