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    A Real Intertemporal Model With Investment Chapter 11 - Part Ii

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    The document summarizes a two-period real intertemporal model with investment. It describes the key components of the model including representative consumers, firms, and the government. It then outlines the competitive equilibrium conditions for the current period labor market, goods market, and credit market. Specifically, it derives the labor demand and supply schedules, defines the output supply curve based on the labor market equilibrium, and derives the output demand curve based on the income balance condition. It analyzes how changes in exogenous variables like productivity, government spending, and capital stock affect the labor market and output supply curve.

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    A Real Intertemporal Model With Investment Chapter 11 - Part Ii

    Uploaded by

    Teachers Online
    30 views31 pages
    The document summarizes a two-period real intertemporal model with investment. It describes the key components of the model including representative consumers, firms, and the government. It then outlines the competitive equilibrium conditions for the current period labor market, goods market, and credit market. Specifically, it derives the labor demand and supply schedules, defines the output supply curve based on the labor market equilibrium, and derives the output demand curve based on the income balance condition. It analyzes how changes in exogenous variables like productivity, government spending, and capital stock affect the labor market and output supply curve.

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    ECO3152_Ch 11 2019 CE

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    The document summarizes a two-period real intertemporal model with investment. It describes the key components of the model including representative consumers, firms, and the government. It then outlines the competitive equilibrium conditions for the current period labor market, goods market, and credit market. Specifically, it derives the labor demand and supply schedules, defines the output supply curve based on the labor market equilibrium, and derives the output demand curve based on the income balance condition. It analyzes how changes in exogenous variables like productivity, government spending, and capital stock affect the labor market and output supply curve.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    30 views31 pages

    A Real Intertemporal Model With Investment Chapter 11 - Part Ii

    Uploaded by

    Teachers Online
    The document summarizes a two-period real intertemporal model with investment. It describes the key components of the model including representative consumers, firms, and the government. It then outlines the competitive equilibrium conditions for the current period labor market, goods market, and credit market. Specifically, it derives the labor demand and supply schedules, defines the output supply curve based on the labor market equilibrium, and derives the output demand curve based on the income balance condition. It analyzes how changes in exogenous variables like productivity, government spending, and capital stock affect the labor market and output supply curve.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 31

    A Real Intertemporal Model

    with Investment

    CHAPTER 11 - PART II
    Learning objectives

    • Define the competitive equilibrium in the two-period model


    with investment.
    • Derive the equilibrium conditions for
    – the current period labour market
    – the current period goods market
    – the credit market
    • Evaluate how changes in exogenous variables affect
    – the labour demand schedule
    – the labour supply schedule
    – the output supply curve
    – the output demand curve

    ECO 3152 1-2


    Two-period model with endogenous production:
    Overview
    • Two periods: the current and the future.
    • Three types of agents:
    – The representative consumer
    – The representative firm
    – The government
    • The agents interact in the following markets
    – The labour market in the current and future periods
    – The goods market in the current and future periods
    – The credit market in the current period

    ECO 3152 1-3


    Two-period model with endogenous production:
    Overview
    • Representative Consumer
    – Makes work/leisure & consumption/savings decisions to
    maximize the lifetime utility
    • Representative Firm
    – Hires labour in the current and future periods & invests in
    the current period to maximize profits
    • Government
    – Provides public goods. Levies taxes and issues debt, but
    satisfies the intertemporal budget constraint.

    ECO 3152 1-4


    Competitive equilibrium

    • A competitive equilibrium is a set of quantities {C, C’, l, l’,


    Ns, Ns’, Sp; Nd, Nd’, Id, Y, Y’, K’, π, π’, T, T’, B} and prices {w,
    w’ and r} such that for any given values of {K, G, G’, z, z’}
    – The consumer solves the utility maximization problem,
    given the market prices;
    – The firm solves the profit maximization problems, given
    the market prices;
    – The government satisfies the intertermporal budget
    constraint;
    – The prices adjust so that all markets are in equilibrium.

    ECO 3152 1-5


    We will focus on the competitive equilibrium in
    the current period

    ECO 3152 1-6


    The competitive equilibrium in the current period
    is summarized by two markets
    • The labour market (given the real interest rate r)
    – The labour supply schedule
    – The labour demand schedule
    – Equilibrium outcomes: N and w
    • The goods market
    – The output supply curve
    – The output demand curve
    – Equilibrium outcomes: Y and r

    • The credit market clears by Walras’ law.

    ECO 3152 1-7


    The labour market in the current period

    • The labour demand schedule tells how much labour the


    representative firm wants to hire at any given wage rate.

    – The labour demand is given by MPN = w.


    • The labour supply schedule tells how much the
    consumer is willing to work for any given wage rate
    (keeping the real interest rate fixed at r).
    – The labour supply is driven by the trade-offs between the
    current consumption and current leisure and between current
    and future leisure as well as by the intertemporal budget
    constraint.

    ECO 3152 1-8


    The current period labour market equilibrium

    • The labour demand curve has


    a negative slope because MPN
    is decreasing with N.
    • The labour supply has a
    positive slope under the
    assumption that the
    substitution effect dominates
    the income effect.
    • The labour market equilibrium
    is obtained for the given value
    of the real interest rate r.

    ECO 3152 1-9


    WORKSHEET: The labour market equilibrium

    • What effect do the changes in the following exogenous


    variables have on the labour demand schedule, the
    labour supply schedule and the labour market
    equilibrium employment and wage?
    – An increase in z
    – An increase in z
    – An increase in G
    – An increase in G’
    – An increase in K

    ECO 3152 1-10


    WORKSHEET: The labour market equilibrium

    ECO 3152 1-11


    Equilibrium output, given
    the real interest rate r

    In panel (a), given r, the


    intersection of the current
    labour supply and labour
    demand curves determine
    the equilibrium real wage
    w* and employment N*.

    The production function in


    panel (b) then determines
    the aggregate output Y*

    ECO 3152 1-12


    The goods market in the current period

    • The output supply curve is the locus of the


    combinations of Y and r for which the labour market is
    in equilibrium
    • The output demand curve is the locus of the
    combinations of Y and r for which the income balance
    condition is met.
    • The equilibrium in the goods market gives Y and r.

    ECO 3152 1-13


    Construction of the
    output supply curve
    In panel (a), an increase in r
    shifts the labour supply curve
    to the right leading to an
    increase in equilibrium
    employment
    Panel (b) implies an increase
    in Y following an increase in r
    Panel (c) shows the output
    supply curve

    ECO 3152 1-14


    Shifts in the output supply curve
    • Any exogenous factor that disturbs the labour market
    equilibrium will affect the output supply curve.
    • Three factors that shift the output supply curve
    – Consumer’s lifetime wealth
    – Current total factor productivity
    – Current capital stock
    • Changes in the lifetime wealth shift the labour supply
    curve and therefore shift the output supply curve
    • Changes in current total factor productivity or current
    capital stock shift the production function and the labour
    demand curve, and hence shift the output supply curve

    ECO 3152 1-15


    Effect of government spending on Ys

    An increase in G or G' shifts the output supply curve to


    the right because
    • A) lifetime wealth increases, a positive income effect that shifts
    labour supply to the right.
    • B) lifetime wealth decreases, a negative income effect that shifts
    labour supply to the left.
    • C) lifetime wealth decreases, a negative income effect that shifts
    labour supply to the right.
    • D) the increase in the real interest rate shifts output supply.
    • E) the decrease in the real interest rate shifts output supply.

    ECO 3152 1-16


    Effects of higher TFP on Ys
    An increase in total factor productivity causes the
    • A) production function to shift up, labour demand to shift right,
    and output supply to shift right.
    • B) production function to shift up, labour demand to shift left,
    and output supply to shift right.
    • C) production function to shift up, labour demand to shift right,
    and output supply to shift left.
    • D) production function to shift down, labour demand to shift
    left, and output supply to shift left.
    • E) production function to shift down, labour demand to shift
    right, and output supply to shift right.

    ECO 3152 1-17


    An increase in G or G’

    An increase in current or
    future government
    spending shifts the Ys curve
    to the right

    ECO 3152 1-18


    An increase in z

    An increase in current total


    factor productivity shifts the
    Ys curve to the right

    ECO 3152 1-19


    An increase in K

    An increase in K shifts the


    production function upward
    This shifts the labour demand
    curve and the output supply
    curve to the right

    ECO 3152 1-20


    The demand for current goods

    • The demand in the economy in the current period


    consists of three components:
    – the demand for goods from the representative consumer;
    – the demand for investment from the representative firm;
    – the demand for the public goods from the government.

    ECO 3152 1-21


    Demand for current consumption goods

    ECO 3152 1-22


    Demand for investment goods

    ECO 3152 1-23


    The total demand for current goods

    • Total current aggregate demand Y is the sum of


    – The demand for current consumption goods Cd(r)
    – The demand for investment goods Id(r)
    – Government purchases of current goods G
    • Given r, the income balance condition determines
    the equilibrium demand for current goods
    – It is the aggregate income that generates the total demand for
    goods just equal to that quantity of aggregate income

    ECO 3152 1-24


    The demand for current goods Y  C d
    ( r )  I d
    (r )  G

    ECO 3152 1-25


    The marginal propensity to consume

    • MPC = the increase in the demand for consumption


    goods induced by a one-unit increase in current
    income.

    ECO 3152 1-26


    The equilibrium demand for current goods

    The equilibrium demand


    for current goods, given
    the real interest rate r, is
    the aggregate income at
    which
    the Cd(r) + Id(r) + G
    curve intersects the 45
    degree line

    ECO 3152 1-27


    Derivation of the output demand curve

    ECO 3152 1-28


    Derivation of the output demand curve (continued)

    • The figure on the previous slide illustrates the derivation


    of the output demand curve
    • In panel (a), an increase in r shifts the Cd(r) + Id(r) + G
    curve down leading to a decrease in equilibrium demand
    for current goods
    • Panel (b) shows the output demand curve Yd, which is the
    locus of the combinations of Y and r for which the income
    balance condition is met

    ECO 3152 1-29


    WOKRSHEET: Which factors shift the output
    demand curve to the right?
    • A decrease in the present value of taxes.
    • An increase in the future income.
    • An increase in the future total factor productivity.
    • A decrease in the current capital stock.

    ECO 3152 1-30


    Summary: The complete real intertemporal model

    ECO 3152 1-31

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