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Advanced Macroeconomics 306
Section: A Real Intertemporal Model with
Investment-Part II

spring 2016 – UPEI

Advanced Macroeconomics 306 Section: A Real Intertemporal M

Agenda
Develop a real intertemporal model that will serve as a basis
for studying business cycles, with both consumption-savings
decisions and leisure-work decision;
Describe each economic agents’ problem:
fundamentals
objectives
constraints

Define the equilibrium concept (competitive)
ties the players together such that their behavior is consistent
with each others
i.e. markets clear (demand = supply)

Use the model to do experiments
Analyze impact of changing exogenous variables on
endogenous variables (choices, prices)

Advanced Macroeconomics 306 Section: A Real Intertemporal M

Constructing the supply and demand curve

There are three prices in this economy: w, w0 , and r;
Wages are determined in the labour markets;
Thus we are left with r to pair with demand and supply of
real goods.

Advanced Macroeconomics 306 Section: A Real Intertemporal M

Constructing the output supply curve

How does a change in r a↵ect the quantity supplied in the
economy?

Answer: through a↵ecting the labour supply,
M RSl,c0 = w(1 + r);

Events that shift the supply curve: change in government
expenditure G and change in total factor productivity z.

Advanced Macroeconomics 306 Section: A Real Intertemporal M

Constructing the output supply curve

Advanced Macroeconomics 306 Section: A Real Intertemporal M

Change in government expenditure, a↵ecting the Y s curve

Advanced Macroeconomics 306 Section: A Real Intertemporal M

Change in total factor productivity, a↵ecting the Y s curve

Advanced Macroeconomics 306 Section: A Real Intertemporal M

Constructing the output demand curve

How does a change in r a↵ect the quantity demanded in the
economy?

Answer: through a↵ecting the consumption demand,
0
M RSc,c0 = (1 + r) and Investment demand, M PK
d = r;

Events that shift the demand curve: change in government
expenditure G, changes in present value of taxes, changes in
future income, changes in future total factor productivity z 0
and changes in current capital stock K.

Advanced Macroeconomics 306 Section: A Real Intertemporal M

Constructing the output demand curve

Advanced Macroeconomics 306 Section: A Real Intertemporal M


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