An increase in the interest rate will cause a clockwise rotation in the budget line as shown in the next diagram. The government and ricardian equivalence chapter 6, part 2 topics in macroeconomics 2. In addition, consumption patterns are constrained by the prevailing real interest rate r which represents a payment or reward for foregoing current consumption. Within the twoperiod consumption model, it is interesting to look at the effect of changes in the interest rate and future expected income on consumption patterns and on savings or borrowing activity. Financial economics i slide 122 a nonbinding agreement right but not an obligation to buy an asset in the future, at a price set today preserves the upside potential, while at the same time eliminating the unpleasant downside for the buyer. Macroeconomics 1880 1900 1920 1940 1960 1980 2000 matthiasdoepke universityofchicago andreaslehnert boardofgovernorsofthe federalreservesystem andreww. A twoperiod model of the current account obstfeld and rogo. Slides for chapter 3 an intertemporal theory of the current. In each period there is a single, nonstorable consumption good. What is the slope of a consumers lifetime budget constraint.
Bimal jalans formidable analysis of the last four decades of indias economic journey illuminates the nations transition from a strictly regulated, slowgrowth state enterprise to one of the fastestgrowing. We were initially attracted to the two period macroeconomic framework used inwilliamson2014, for whichbarro 1997 served as a precursor. Defining a competitive equilibrium for a two period model. Macroeconomics uses a thoroughly modern approach by building macroeconomic models from microeconomic principles. Ba 561 global issues and macroeconomics period 3 2016. Relatedly, modern macroeconomics takes dynamics seriously. V chari, timothy kehoe and ed ward prescott, my excolleagues at stanford, robert hall, beatrix paal and tom.
A twoperiod model of the current account obstfeld and. A brief overview of the history of macroeconomics ii 1972, rational expectations revolution. This constraint, which summarizes the constraints put on the dynamic path of consumption from the combination of the two perperiod constraints, is customarily called the. Consider the simple twoperiod consumptionsaving problem max fc 0. The setup is su ciently simple that it can allow a nonspecialist or a policymaker to easily perform backoftheenvelope analysis. Financial economics i slide 072 introduction accommodate multiple and even infinitely many periods. Macroeconomics 6th edition pdf free download the pearson series. The simplest dynamic models have two periods and that is where we begin. The macroeconomics 6th edition pdf free download file has been uploaded to an online repository for the safe downloading. Two period consumptionsaving models eric sims university of notre dame spring 2015 1 introduction this note works through some simple twoperiod consumptionsaving problems.
In a multiperiod model, savingborrowing and the interest rate are key elements. Slides for chapter 3 an intertemporal theory of the. Twoperiod economies interest always carrieth with it an ensurance praemium. Macroeconomics 6th edition pdf free download the pearson. It is to consumption what the solow model is to the study of economic growth. A closedeconomy oneperiod macroeconomic model economics 3307 intermediate macroeconomics aaron hedlund baylor university fall 20 econ 3307 baylor university static equilibrium fall 20 1 15. This workhorse model allows us to develop a better, more intuitive understanding of the microfoundations of consumption that were summarized earlier in chapter 10. The time structure of the model is illustrated in fig.
Macroeconomics is about dynamics, and about how the different decisions. Williamsons macroeconomics uses a thoroughly modern approach that is consistent with the way that macroeconomic research is conducted today. Do i just rewrite what competitive equilibrium is from the lecture notes, or do i have to define one from the problem above. Pv of a 2 period model sum of the present values in each of the 2 years. The idea is to combine the consumption, saving, and portfolio decisions of agents we studied earlier with the production and investment decisions of rms and nd.
There are three classes of demanders or buyers of goods. The behavior of aggregates and their interrelations are results of decisions. If we dont go over any other material, the midterm more on this below will cover everything up to and including the oneperiod model. In this case, you would be at an equilibrium in period 1. Equilibrium defined as a state in which there is no tendency to change or a position of rest will be found when the desired amount of output demanded by all the agents in the economy exactly equals the amount produced in a given time period. Macroeconomics part 3 in this part we shift our point of view and take a snapshot of the economy, looking at it over such a short period that its productive resources are fixed but such a long period that wages and. In the flexibleprice model of the macroeconomy, two sets of factors determine the. Macroeconomic theory dirk krueger1 department of economics university of pennsylvania january 26, 2012 1i am grateful to my teachers in minnesota, v.
October 5, 2015 our next step is to look at equilibrium prices and quantities in the same two period setting we used earlier. The consumers bc is now characterized by two equations. In every period two generations are alive and interact with each other as indicated by the arrows. If youd expect him to do something stupid with the savings in period 2 say, throw them away, then it would be optimal to save nothing at all. National income accounting, prices, saving, and labor markets. The keynesian model described above is completely demanddriven. I suggest you go over these slides and the problem sets the ta have posted. Introduction in macroeconomics, we study behavior of economywide aggregates e. This function describes total utility as a function of consumption in every period 1, 2, 3, and is the analog of the utility function uc c, 12 in our twoperiod model. Theory of ca the model economy a twoperiod small open economy.
Other readers will always be interested in your opinion of the books youve read. A closedeconomy oneperiod macroeconomic model economics 4353 intermediate macroeconomics aaron hedlund university of missouri fall 2015 econ 4353 university of missouri static equilibrium fall 2015 1 15. Exponentialgrowth 0 1 2 0 5 10 15 20 25 year n lnvn figure1. The function v above is quite intractable mathematically because it takes an infinite number of arguments. The strategy is to formulate a twoperiod nonstochastic version of each model and. View notes slide04 from econ 224 at university of liverpool. A closedeconomy one period macroeconomic model part 1 neha bairoliya spring 2014.
Macroeconomics 2006 week 5 seminar questions questions for. Second, one can think of this twoperiod model without storage as an auction. We have adopted this two period framework for partsiiithrough v. In the two period model, the nature of the asymmetric information is that. They consume an endogenous fraction of this income and save the remainder for retirement. A simple intertemporal model a static intertemporal model with one nonstorable good agents live for two periods. Two sector model free download as powerpoint presentation. A closed economy oneperiod macroeconomic model chapter 5 topics in macroeconomics 2 economics division university of southampton. Savingborrowing allows the consumer to smooth consumption over time. Financial economics i slide 122 a nonbinding agreement right but not an obligation to buy an asset in the future, at a price set today preserves the upside potential, while at the same time eliminating the unpleasant. A closedeconomy one period macroeconomic model economics 4353 intermediate macroeconomics aaron hedlund university of missouri fall 2015 econ 4353 university of missouri static equilibrium fall 2015 1 15. These basics will then be useful for us in determining how individuals choose their consumption paths when they realize that their actions a. Simple models to understand and teach business cycle. How is the consumers motive to smooth consumption captured by the shape.
What are the three properties of a consumers preferences. A closedeconomy one period macroeconomic model economics 3307 intermediate macroeconomics aaron hedlund baylor university fall 20 econ 3307 baylor university static equilibrium fall 20 1 15. As such, it is consistent with the way that macroeconomic research is conducted today. This model was set up to study a closed economy, and we will assume that there is a constant population. The consumptionsavings decision and credit markets neha bairoliya spring 2014. Two polar kinds of economies are analyzed and compared. Gdp, savings, investment, employment and so on and their interrelations. In the two period model with asymmetric information, a oneunit increase in the real rate of interest on bank deposits causes the real loan interest rate to increase by more than one unit. That said, our experience suggested that the intertemporal supply relationship due to. This constraint, which summarizes the constraints put on the dynamic path of consumption from the combination of the two per period constraints, is customarily called the. Households receive endowments q1 and q2 in periods 1 and 2, respectively.
Macroeconomics part 3 in this part we shift our point of view and take a snapshot of the economy, looking at it over such a short period that its productive resources are fixed but such a long period that wages and prices are fully flexible. October 5, 2015 our next step is to look at equilibrium prices and quantities in the same twoperiod setting we used earlier. In a multiperiod model, savingborrowing and the interest rate are. The neoclassical model we explore in this chapter is a fundamental building block of modern macroeconomics. The history of macroeconomics from keyness general. A twoperiod model consumers experiments introduction intertemporal decisions macroeconomics studies how key variables evolve over time the simplest way to think about intertemporal decisions is in a twoperiod model the. A competitive equilibrium for this economy is a price r and quantities c1,c2,k such that i agents maximize utility given the price ii markets clear. A closedeconomy oneperiod macroeconomic model part 1 neha bairoliya spring 2014. Most modern dynamic models of macroeconomics build on the framework described in solows 1956 paper. Macroeconomics 6th edition pdf free download section. Introduction and the solow model mit opencourseware. However, your choices for period 2 would be nonoptimal, hence we do not have a 2 period equilibrium. Lecture notes for macroeconomics i, 2004 per krusell. A closed economy oneperiod macroeconomic model chapter 5.
Whether youve loved the book or not, if you give your honest and detailed thoughts then people will find new books that are right for them. Basic setup of the model time is discrete, t 1,2,3. In this model households receive an exogenous stream of income and have to decide how much to consume and save. Macroeconomics 6th edition pdf free download the pearson series in economics. As usual, to develop the model we will state the assumptions. I di erent response to changes in rst period income.
Individuals live for two periods, so that in any period the economy has two cohorts interacting with each other. Two points must be emphasized about our simple keynesian model of the economy. Slide04 econ224 macroeconomics ii chapter 9 a twoperiod. Even when the sum of consumer, firm, and government demands is greater than what is produced in any given period, firms can always meet demand by.
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