Discuss the Lucas Critique of traditional structural Keynesian macroeconomics. Explain why theEuler Equation below is immune to the Lucas critique and explain its main implications forhousehold consumption.u' (C₁) = (1 + 1) E₁u' (C (+1)Ct is consumption at time t and C++1 is consumption in the next periodp> 0 is the rate of time discount (degree of impatience)i is the fixed interest rate on a risk free assetEt is the expectation at time t (today)

The Lucas Critique, proposed by Robert Lucas in 1976, is a critique of traditional Keynesian…

Answered: Discuss the Lucas Critique of…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Egypt authorities faced significant health and economic policy challenges during the COVID19 Pandemic, shutting down certain industries to protect public health. This shutdown resulted in almost 1 million jobs lost in April and May 2020, and a dramatic fall in consumers’ and firms’ confidence to spend and invest. Describe the effect that a fall in confidence had upon output in the Egypt economy using a Keynesian model of the macroeconomy. Ensure that your analysis includes the following:(i) the components of expenditure that are affected and why;(ii) the adjustment process associated with moving from an initial equilibrium (before the onset of the pandemic) to a new equilibrium (after the significant job losses), i.e. the mechanism that leads to a change in output (including a relevant diagram);(iii) an explanation of what the multiplier is and its role in explaining the fall in output; and(iv) a discussion of the policy actions that can restore aggregate demand to its initial level.
Consider the production function modelled by the following equation: Y₁ = AK₁-α(BH₂)ªL₹ where Kt is capital, Ht is human capital, Lt is the number of workers, B is a scalar larger than 0, A is the (constant) level of technology, 0 < a <1 and 0 <ɛ<1. a) Does this production function satisfy all the neoclassical properties? Discuss the meaning of each property intuitively and mathematically. t Imagine that parents invest in the human capital of their children up to the point where the marginal product of physical capital, Kt, is equal to the marginal product of human capital, Ht. b) What is the relation between Kt and Ht? Use this relation to write down total output as a function of Kt only. Q3(b) in order to make output a function of K alone, after establishing that H and K are proportional, should we also establish H=h*L to remove L from the equation? Or are we treating L and H as independent variables like we did for the previous PSET and question 3(a) above.
State the assumptions of the 4th generation Keynesian model and explain how its endogenous variables are determined graphically Graphically demonstrate how to construct an IS(LM) curve. State the product market equilibrium condition, define an IS curve and explain why it is downward sloping.
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Consider the two-period Real Business Cycle (RBC) model without uncertainty presented in the lecture slides, but with one modification. Now assume that the instantaneous utility function for households takes the form: where Ct is consumption at time t and (1- lt) is leisure time at time t. Given that the time endowment is normalized to 1, it follows that lt is hours worked at time t. Finally, Ɵ > 0, b > 0 and gamma > 0 are parameters. All households in the economy are assumed to be identical. We can therefore consider a 'representative household' (henceforth 'the household'). Set t = 1 for the present period and set t = 2 for the next period. For example, C1 is consumption in the present period and C2 is consumption in the next period. Remember, this is a two-period model so there are no time periods prior to t = 1 and there are no time periods after t = 2 Assume that the household begins and ends life with no accumulated wealth and that the real interest rate is r (where…
Consider a two-period model in which the goverment introduces a tax on interest earnings. This means that borrowers pay a net interest rate of r, however lenders (savers) receive a net interest rate of (1 – t)r on their savings, where t is the tax rate withheld by the government and is a multiplication sign. Let r = 8 percent and t = 28 percent. Consider a consumer who is a saver. Answer parts a), b), c) and d) below. Round your numerical answer in part a) to 3 decimal places. a). The relative price of consumption today to consumption tomorrow for this saver is b). Suppose the tax rate increases. How does the saver's relative price of consumption today change? A. Consumption today has the same price relative to consumption tomorrow. B. Consumption today becomes relatively more expensive C. Consumption today becomes relatively cheaper c). As a result, the substitution effect shows that A. Consumption today increases, while consumption tomorrow decreases B. Consumption today remains…
Consider the following one-period model. Consumer Utility function over consumption (C) and leisure (L) U(C,L)= C^(1/2)L^(1/2) = Total hours: H = 40 Labour hours: = H – L Non-labour income: π Lump-sum tax: T Hourly wage: w Firm Production function: Y = zF() = z Total factor productivitiy: z = 2 Government Government spending (exogenous): G = 20 Suppose that the total factor productivity, z, increases to 5. What is the substitution effect of this wage change on labour supply()? A. +8.51 B. -5.51 C. -8.51 D. +5.51 E. None of the above
Describe, in detail; how you can best fix the problem (provide pluses and minuses associated with your supplied problem solution)? The phase of recession is the phase of business cycle in which the economic activities experience the downward trend. The demand in the economy falls , business investment decreases because of decreased scope of sales and unemployment rises leading to fall in GDP. The root cause inside the case is the declining sales and productivity of Moto's Integrated Controls Division (ICD) because of a drop in worldwide demand for machine devices prompted by the recession and savage rivalry. The ICD detailed a 5% downfall in sales in 1982 and again in the initial a half year of 1983, which put the future of the business in uncertainty. To keep the business running, the company needed to justify spending $3 million which it had done on various kinds of technological improvements and innovations , and there were questions about whether the investment could be…

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