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Chapter 5 A Closed- Economy One-Period Macro- economic Model Copyright © 2014 Pearson Education, Inc.
1-2 © 2014 Pearson Education, Inc. Chapter 5 Topics Introduce the government. Construct closed-economy one-period macroeconomic model, which has: (i) representative consumer; (ii) representative firm; (iii) government. Economic efficiency and Pareto optimality. Experiments: Increases in government spending and total factor productivity. Consider a distorting tax on wage income and study the Laffer curve. Public goods: How large should the government be?
1-3 © 2014 Pearson Education, Inc. Closed-Economy One-Period Macro Model Representative Consumer Representative Firm Competitive Equilibrium Experiments: What does the model tell us are the effects of changes in government spending and in total factor productivity?
1-4 © 2014 Pearson Education, Inc. Figure 5.1 A Model Takes Exogenous Variables and Determines Endogenous Variables
1-5 © 2014 Pearson Education, Inc. Competitive Equilibrium Representative consumer optimizes given market prices. Representative firm optimizes given market prices. The labor market clears. The government budget constraint is satisfied, or G = T.
1-6 © 2014 Pearson Education, Inc.v Income-Expenditure Identity In a competitive equilibrium, the income-expenditure identity is satisfied, so
1-7 © 2014 Pearson Education, Inc. The Production Function
1-8 © 2014 Pearson Education, Inc. Figure 5.2 The Production Function and the Production Possibilities Frontier
1-9 © 2014 Pearson Education, Inc. Figure 5.3 Competitive Equilibrium
1-10 © 2014 Pearson Education, Inc. Key Properties of a Competitive Equilibrium
1-11 © 2014 Pearson Education, Inc. Figure 5.4 Pareto Optimality
1-12 © 2014 Pearson Education, Inc. Key Properties of a Pareto Optimum In this model, the competitive equilibrium and the Pareto optimum are identical. We know this as, at the Pareto optimum,
1-13 © 2014 Pearson Education, Inc. First and Second Welfare Theorems These theorems apply to any macroeconomic model. First Welfare Theorem: Under certain conditions, a competitive equilibrium is Pareto optimal. Second Welfare Theorem: Under certain conditions, a Pareto optimum is a competitive equilibrium.
1-14 © 2014 Pearson Education, Inc. Figure 5.5 Using the Second Welfare Theorem to Determine a Competitive Equilibrium
1-15 © 2014 Pearson Education, Inc. Effects of an Increase in G Essentially a pure income effect C decreases, l decreases, Y increases, w falls
1-16 © 2014 Pearson Education, Inc. Figure 5.6 Equilibrium Effects of an Increase in Government Spending
1-17 © 2014 Pearson Education, Inc. World War II Increase in G Very large increase in G. Y increases, C decreases by a small amount.
1-18 © 2014 Pearson Education, Inc. Figure 5.7 GDP, Consumption, and Government Expenditures
1-19 © 2014 Pearson Education, Inc. Effects of an Increase in z (or an increase in K) PPF shifts out, and becomes steeper – income and substitution effects are involved. C increases, l may increase or decrease, Y increases, w increases.
1-20 © 2014 Pearson Education, Inc. Figure 5.8 Increase in Total Factor Productivity
1-21 © 2014 Pearson Education, Inc. Figure 5.9 Competitive Equilibrium Effects of an Increase in Total Factor Productivity
1-22 © 2014 Pearson Education, Inc. Figure 5.10 Income and Substitution Effects of an Increase in Total Factor Productivity
1-23 © 2014 Pearson Education, Inc. Figure 5.11 Deviations from Trend in GDP and the Solow Residual
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. Chapter 13 International Trade in Goods and Assets.
Copyright © 2002 Pearson Education, Inc. Slide 1.
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. Chapter 10 A Monetary Intertemporal Model: Money, Prices, and Monetary Policy.
A Real Intertemporal Model with Investment
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-1 CHAPTER 6 Building Blocks of the Flexible-Price Model.
Labor-Leisure Choice – Indifference Curves Graph by Harcourt, Inc. Just like the indifference curves used to derive consumer demand. Tradeoff is between.
Aggregate Demand Module 17.
General Equilibrium and Efficiency. General Equilibrium Analysis is the study of the simultaneous determination of prices and quantities in all relevant.
Consumption & Saving Over Two Periods Consumption and Saving Effects of Changes in Income Effects of Interest Rates.
CHAPTER 8 Aggregate Expenditure and Equilibrium Output © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case,
Search and Unemploy-ment
Chapter 5 A Closed- Economy One-Period Macroeconomic Model Copyright © 2010 Pearson Education Canada.
Chapter 9 A Two-Period Model: The Consumption-Savings Decision and Credit Markets Copyright © 2014 Pearson Education, Inc.
Copyright © 2012 Pearson Addison-Wesley. All rights reserved. Chapter 9 The IS Curve.
Chapter 1 Introduction.
Chapter 2 Overview of the Labor Market. Copyright © 2003 by Pearson Education, Inc.2-2 Figure 2.1 Labor Force Status of the U.S. Adult Civilian Population,
Copyright © 2010 Pearson Education Canada
Chapter 3: National Income. Production Function Output of goods and services as a function of factor inputs Y = F(K, L) Y = product output K = capital.
Chapter 6 Supply of Labor to the Economy: The Decision to Work.
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