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Advanced Macroeconomics 306
Section: A Real Intertemporal Model with
Investment

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

Model Assumptions

two periods of time
3 types of agents: consumers, firms and government
Consumers and firms optimize
i.e. make themselves as well o↵ as possible, or
maximize profits;
and they are rational
i.e. make optimal decisions given all available
information
Agents in the economy borrow and lend to each other by
issuing one-period bonds.

Advanced Macroeconomics 306 Section: A Real Intertemporal M

Consumer Fundamentals
Simplifying assumption: one representative consumer

Advanced Macroeconomics 306 Section: A Real Intertemporal M

Consumer Fundamentals
Simplifying assumption: one representative consumer
Consumer has preferences (or tastes) defined over a general
consumption good and lesiure (non-market time) for both
period.

Advanced Macroeconomics 306 Section: A Real Intertemporal M

Consumer Fundamentals
Simplifying assumption: one representative consumer
Consumer has preferences (or tastes) defined over a general
consumption good and lesiure (non-market time) for both
period.
Preferences are measured by a utility function:
U (c, l) + U (c0 , l0 )
where
c = quantity of consumption
l = quantity of leisure time

Advanced Macroeconomics 306 Section: A Real Intertemporal M

Consumer Fundamentals
Simplifying assumption: one representative consumer
Consumer has preferences (or tastes) defined over a general
consumption good and lesiure (non-market time) for both
period.
Preferences are measured by a utility function:
U (c, l) + U (c0 , l0 )
where
c = quantity of consumption
l = quantity of leisure time

A particular combination of c and l: (c⇤ , l⇤ , c0⇤ , l0⇤ ) is called a
consumption bundle.

Advanced Macroeconomics 306 Section: A Real Intertemporal M

Consumer’s Objective

The consumer’s objective is to choose how much to consume
and work(leisure) today, how much to save (borrow), and how
much to consume and work tomorrow.
Since she is rational she will choose the consumption bundle
that maximizes her utility subject to her constraints.

Advanced Macroeconomics 306 Section: A Real Intertemporal M

Consumer Fundamentals

Standard Assumptions on Preferences:
1

Consumer prefers more to less

2

Consumer prefers more diversity to less

3

Di↵erentiability

Advanced Macroeconomics 306 Section: A Real Intertemporal M


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