Final Review

• Closed book, closed note, you can bring calculator

• Focus more on the lectures after midterm

• Content: Everything We have learned so far

• Tue

1 Static Economy

• The representative consumer’s problem and firm’s problem

• Understanding the optimization conditions

• Define equilibrium and SPP and Why they are equivalent

• Effect from Government spending and TFP

The Optimization Conditions

Effect from G increase

2 Consumption and Saving

• In a two-period model with consumption-savings choice, what is the consumer’s lifetime budget constraint? What is the optimal condition for consumer’s intertemporal choice?

• Lifetime budget constraint• How do we derive this budget constraint?

' ' '( )

1 1 1

c y tc y t

r r r

• The optimal condition• Special case, perfect complement• Lender and borrower

3 Basic assumptions in Chap 10

• N=h-l increases when w increases. Here we assume the substitution effect of a change in w i

s always larger than the income effect.• N increases when the real interest rate r increases. w(1+r)/w’ is the current price of leisure relative to the futur

e price of leisure. And we assume again the substitution effect is larger than the income effect.

• N decreases when the lifetime wealth increases. Because leisure is the normal good.

• Current consumption will decrease if real interest rate r increases by assuming the substitution effect dominates.

• Holding constant Y and r, if lifetime wealth increases, current consumption increases.

Figure 9.2 An Increase in the Real Interest Rate Shifts the

Current Labor Supply Curve to the Right

Figure 9.3 Effects of an Increase in Lifetime Wealth

4 understanding supply and demand curve

• Derivation of output supply and output demand curve

• Both of them are about the real interest rate and output

Figure 9.12 Construction of the Output Supply Curve

Figure 9.16 Construction of the Output Demand Curve

5 Equilibrium analysis

• Equilibrium effect from government spending, TFP, and capital sock

Figure 9.19 A Temporary Increase in Government

Purchases

• About the future government spending increasing

• Homework question

Figure 9.22 The Equilibrium Effects of a Decrease in the

Current Capital Stock

Figure 9.23 The Equilibrium Effects of

an Increase in Current Total Factor Productivity

Figure 9.24 The Equilibrium Effects of

an Increase in Future Total Factor Productivity

6 Growth Model

7 Open Economy

• Analyze current account, consumption, investment in small open economy