University of Waterloo
Department of Economics
ECON 402-001, Spring 2014
Macroeconomic Theory 3
Course Outline
Professor: Kate Rybczynski
Lectures: 2:30-3:50pm AL 208, Tues & Thurs
Office: 242 Hagey Hall
Hours: Tuesday, Thursday 10:30-12:00noon, or by app
Economics 402
Fall 2016
Francisco M. Gonzalez
8. Growth accounting
The Neoclassical production function
Consider a production function that transforms labor and capital inputs into output
Y = F (K; L):
(1)
The neoclassical production function satis es the
1
Economics 402
Fall 2016
Francisco M. Gonzalez
2. Optimal consumption-saving decisions
Consider the following two-period model of saving. An agent seeks to maximize lifetime utility
U (c1 ; c2 ) = u (c1 ) + u (c2 ) ;
(1)
with 2 (0; 1); u0 > 0; u00 < 0; w
1
Economics 402
Fall 2016
Francisco M. Gonzalez
The AK model
Consider the Neoclassical (exogenous) growth model. Recall that the equilibrium dynamics
of the stock of capital per e ective labor is given by:
Kt+1
=
At+1 Lt+1
!
Kt
s (1
)
K0
f
> 0;
, for give
1
Economics 402
Fall 2016
Francisco M. Gonzalez
4. Neoclassical theory of economic growth
Consider the competitive equilibrium discussed in the previous lecture notes (i.e., 3 A General
Equilibrium Model with Overlapping Generations). Recall that the equi
1
Economics 402
Fall 2016
Francisco M. Gonzalez
3. A General Equilibrium Model with Overlapping Generations
Samuelson's (1958) overlapping generations model has evolved into the simplest dynamic
general equilibrium model of an economy that lasts forever,
1
Econ 402
Fall 2016
Francisco M. Gonzalez
1. An Atemporal Robinson Crusoe Economy
Consider a production economy consisting of 1 consumer and 1 rm. First we must specify the
ownership rights of households and rms, as well as the structure of markets. In t
1
Economics 402
Fall 2016
Francisco M. Gonzalez
RATIONAL EXPECTATIONS AND GOVERNMENT POLICY
[1] Expectations matter: the permanent income hypothesis
In our previous discussion of optimal consumption-saving decisions we considered the following
decision pr
1
Economics 402
Fall 2016
Francisco M. Gonzalez
A simple search and matching model of the labor market
The modern approach to the theory of unemployment views the equilibrium unemployment
stock as the result of equilibrium transitions of workers in and ou
University of Waterloo
Department of Economics
ECON 402 001 S14
Assignment # 1
Due: May 22, 11:59pm
Explain/show work for full marks. Hand in assignment at drop-box outside of HH210.
1. Given the following model,
yt= ct + xt
c t = + x t + y t
x t ~ N (0,
University of Waterloo
Department of Economics
ECON 402 001 S14
Assignment # 1 - SOLUTIONS
Due: May 22, 11:59pm
Explain/show work for full marks. Hand in assignment at drop-box outside of HH210.
1. Given the following model,
yt= ct + xt
c t = + x t + y t
University of Waterloo
Department of Economics
ECON 402 Spring 2014
Assignment # 2
Due: June 10, 11:59pm
Answer all of the following questions. Explain/show work for full marks.
1. Consider a Solow economy with human capital, as introduced in class. Assum
University of Waterloo
Department of Economics
ECON 402 S14
Assignment # 3
Due: July 15, 11:59pm
Answer all of the following questions. Explain/show work for full marks.
1. OLG Diamond model, assuming =1 and cobb-douglas utility.
a) If a large fraction of
University of Waterloo
Department of Economics
ECON 402 Spring 2014
Assignment # 2 - SOLUTIONS
Due: June 10, 11:59pm
1. Consider a Solow economy with human capital, as introduced in class. Assume the economy
starts on it's balanced growth path. Now suppos
University of Waterloo
Department of Economics
ECON 402-001
Macroeconomic Theory 3
Spring 2015
2:30pm-3:50pm Monday &Wednesday, AL 124
Instructor: Kate Rybczynski
Office: 242 Hagey Hall
Office Hours: 1:00-2:30 pm Monday, Wednesday, or by appointment
e-mai
Name_
Student # _
University of Waterloo
Department of Economics
ECON 402
Prof. Kate Rybczynski
Term Test 1 solutions
June 10, 2014
Instructions:
NO CALCULATORS.
It is a closed book exam and no cheet sheets are permitted.
TURN OFF ALL CELL PHONES!
You hav
Name
Student #
University of Waterioo
Department of Economics
ECON 492
Prof. Kate Rybczynski
Term Test 2
June-EirEB-l-s
SANA-cfw_cams
Instructions:
N0 CALCULATORS.
it is a ciosed book exam and no cheet sheets" are permitted.
TURN OFF ALL CELL PHONES!
You
Name
Student #
University of Waterloo
Department of Economics
ECON 402
Prof. Kate Rybczynski
Term Test 3
July 13, 2016
Scam
Instructions:
N0 CALCULATORS.
It is a closed book exam and no cheet sheets are permitted.
TURN OFF ALL CELL PHONES!
You have 80 min
The Solow Growth Model
Reading:
Romer, Chapter 1;
Robert E. Lucas Jr., Why Doesnt Capital Flow from Rich to Poor Countries? AER
Papers and Proceedings, 92-96, 1990;
Martin Feldstein and Charles Horioka, Domestic Savings and International Capital
Flows, Ec
1. Consider the Solow Swan Growth model where . k = sf(k) (n+g+d) k where: . L = nL . A = gA d is the rate of depreciation, and s is the rate of savings. a) What is the level of k to which this economy converges? (2)
b) Suppose that the government increas
1. Consider the Solow Swan Growth model where
i<= sf(k) (n+g+d) k
where: ASS?th W 6,1 I? kid
h = nL
A = gA
d is the rate of depreciation, and s is the rate of savings.
a) What is the level of k to which this economy converges? (2)
C0 \Mrnxa S mW/m Vé'o
I. Introduction
(notes only)
Page 1
Goals of course:
*familiarize you with common
macroeconomic models used to understand
the economy
*predict outcomes of various policies or
shocks.
Page 2
Common questions
*what causes unemployment?
*what causes business
II. Growth
(chapters 1, 3, 4(4 ed.) and 2)
th
Page 1
Growth
*economies grow
*we want to know why & how
Page 2
Common Questions:
*Why do some countries have higher
income per capita than others?
*Why do some countries have higher
growth rates than others?
Growth Accounting & Solow-Swan
Can growth accounting explain cross
country differences in growth?
With estimates of convergence we
only looked at initial income and
total growth. We assumed CP.
Growth accounting decomposes
growth so that we can estimate t
Effect of Change in Saving Rate
* Savings is not constant across time,
nor across country.
* Although there is no government in
the model, we know government
policy can affect savings rates.
*What is effect of a discrete change
in s?
Page 1
Initial Impact
2. Human Capital (HC)
What impact does the growth of
knowledge have on growth of Y/L?
Can HC differences explain disparity
of Y/L across countries?
R&D and HC are different
Page 1
Human Capital-acquired skills of
worker
Solow Model With Human Capital
Y t
Growth Accounting, HC Evidence:
Can HC explain cross-country
income differences?
We can test this empirically using
growth accounting.
Assume Cobb-Douglas production
i
1-
Y i =K A i Hi
(402 slide set 8)
, where i is an index of countries
Page 1
Divide b
OLG Model of Growth
Two generations
Each maximizes own lifetime utility
ECON 402 lecture slides 10
Page 1
Basic Diamond Model
*new individuals continually born
and old ones continually die
*discrete time
*assume individuals live 2 periods
ECON 402 lecture
Convergence
If the economy is off the BGP, we
know that it will converge back to the
BGP, k*, but how quickly?
Speed of Convergence
As with Solow model, take first order
approximation of kt+1 around k=k*
dk t1
k t1k *
| k =k * k t k *
d kt
ECON 402 lectur