Question 1. Consider a two-period dynamic macroeconomic model with a representative household, a rep- resentative firm, and a government. The representative household makes consumption-saving and labor-supply decisions. The representative firm makes labor demand and investment decisions. (a) The government announces that an increase in government expenditure will occur next period. Use the model to study the effects on current aggregate output and current employment. Explain your results. (b) Consider the two-period dynamic macroeconomic model again. Analyze the effects of a very short-lived temporary positive shock to total factor productivity (TFP) on output, employ- ment, consumption, investment, the real wage and the real interest rate. Because the shock is very short-lived you should assume that its impact on lifetime wealth is negligibly small.
Question 1. Consider a two-period dynamic macroeconomic model with a representative household, a rep- resentative firm, and a government. The representative household makes consumption-saving and labor-supply decisions. The representative firm makes labor demand and investment decisions. (a) The government announces that an increase in government expenditure will occur next period. Use the model to study the effects on current aggregate output and current employment. Explain your results. (b) Consider the two-period dynamic macroeconomic model again. Analyze the effects of a very short-lived temporary positive shock to total factor productivity (TFP) on output, employ- ment, consumption, investment, the real wage and the real interest rate. Because the shock is very short-lived you should assume that its impact on lifetime wealth is negligibly small.
Chapter1: Making Economics Decisions
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Transcribed Image Text:Question 1.
Consider a two-period dynamic macroeconomic model with a representative household, a rep-
resentative firm, and a government. The representative household makes consumption-saving and
labor-supply decisions. The representative firm makes labor demand and investment decisions.
(a) The government announces that an increase in government expenditure will occur next period.
Use the model to study the effects on current aggregate output and current employment.
Explain your results.
(b) Consider the two-period dynamic macroeconomic model again. Analyze the effects of a very
short-lived temporary positive shock to total factor productivity (TFP) on output, employ-
ment, consumption, investment, the real wage and the real interest rate. Because the shock is
very short-lived you should assume that its impact on lifetime wealth is negligibly small.
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