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…

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter22: Aggregate Demand And Aggregate Supply

Section: Chapter Questions

Problem 15P

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1. A Keynesian macroeconomic model with a single-time-period lag on the consumption function, as described below, is initially in equilibrium and the level of I, is given at 500. Y, = C, + I, C, = 750 + 0.5Y I, is then increased to 650. Use difference equation analysis to find the value of Y, in the fourth time period after this disturbance to the system. Will it then be within 1% of its new equilibrium level? Th
3. Assume that production fun ction takes the form Y = (Ko.5) + L'as)e, Show if %3D this production function obeys neoclassical assumptions. 4. Lets assume that the time derivative of a continuous variable Xa is defined as X = M+ N where, M. and N are also contimuous variables defined by follow ing fun ctions: N = ek+ & M, = et and k is a constant Find the grow th rate of X, at the steadystate in terms of k.
COURSE: MACROECONOMICS - IS-LM MODEL Demonstrate under the assumptions of the IS-LM model the effect of having a consumption function with an exogenous component, an income-dependent part and a part that depends on the interest rate. Graph
With the theoretical prediction of PIH mind, explain how Friedman sought to reconcile the evidence about consumption from cross-sectional data with that from time-series macroeconomic data.
suppose a Keynesian macroeconomic model is characterized with the following equations: Y = C + I + G Goods markets C = C = 320 + 0.8YdYd = Y − TI = 40 − 40rG = 80T = 50 Money marketsMoney demand:(M/P)d = 500 + 0.8 − rMoney supply: MSP = 800Derive IS and LM equations and derive equilibrium income level and interest rate.
2 Consider the log-linear New Keynesian IS Curve Î₁ = Erŷt+1 − − († — Erñt+1) a) Discuss the New-Keynesian IS Curve with focus on the underlying economic mechanisms b) What does parameter o represent? 1 c) How would an increase in future expected real interest rate (î₁ = ît − E₁î₁+1) affect the current level of output? Explain
3. Assume that production function takes the form Y = (K'0.5.) + L'05))E, Show if this production function obeys neoclassical assumptions. 4. Lets assume that the time derivative of a continuous variable Xa is defmed as X= M+ N where, M: and N: are also continuous variables defined by following functions: = ek+ & M, = ek and k is a constant. Find the grow th rate of X at the steady state in terms of k.
Derive the relationship between MPL and MC algebraically. Why is this relationship critical to showing how the law of diminishing returns affects our expectations regarding SR costs?
The neoclassical consumption model, a retirement perspective: Consider thespecial case solved in the text where ! = 1 and utility takes the log form.Suppose the real interest rate is 5 percent. Let’s give this consumer a fnancial profle that might look like that of a middle-aged college professor contem-plating retirement: initial assets are ftoday = $50,000, and the path for labor income is ytoday = $100,000 and yfuture = $10,000.(a) What is the individual’s human wealth? Total wealth?
According to the Keynesian macroeconomic model, the level of intended investment... (check all that apply) is autonomous is determined by the inflation rate depends on the level of optimism or pessimism among investors is determined by savings and the interest rate is a function of the level of output and income is a function of the unemployment rate
1. Consider the following simple Keynesian model, (i) Rewrite the model into matrix form with Y, C and I as endogenous variables and Go and i as exogenous variables. (The coefficient matrix must be a 3 by 3 matrix.) Y=C+I+Go C = 200+ 0.8Y I= 1000-2000 (ii) Compute the equilibria Y*, C* and I* as functions of Go and i using Cramer's rule. 8Y* (iii) Find and di ƏY* ƏGo (iv) Give an economic interpretation of national income? ƏY* " ƏGo what should the government do if it wants to raise
The consumption function of the economy of Macro-land is given by ? = 200 + 0.75(? − ?)The investment function is given by ? = 200 − 25? . Government purchases and taxes are both 100. (a) Find the equation of the IS curve (b) The money demand function in Macro-land is given byMd= ? − 100? The nominal money supply M is 1,000 and the price level is 2. Find the equation of theLM curve (c) Find the interest rate and income for which the goods and services and money marketsare simultaneously in equilibrium. (d) Suppose the government purchases are raised from 100 to 150. What are the newequilibrium interest rate and income? (e) Suppose that the money supply is raised from 1,000 to 1,200. What are the newequilibrium interest rate and national income? (f) How will fiscal expansion in the country (Macro-land) affect national income,employment, interest rate, price level and real money balance under the Keynesianaggregate supply condition? NB: Kindly answer all questions

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