Macroeconomics (Fourth Edition)
4th Edition
ISBN: 9780393603767
Author: Charles I. Jones
Publisher: W. W. Norton & Company
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Question
Chapter 18, Problem 4E
(a)
To determine
Construct budget constraint for each period.
(b)
To determine
The fact about B4.
(c)
To determine
Solve B3 and substitute it in period 2.
(d)
To determine
Solve B2 and substitute it in period 1.
(e)
To determine
Interpret the intertemporal budget constraint.
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Students have asked these similar questions
Assume that an economy is characterized by the following equations:
C = 100 + 0.5(Y – T)
T = 100
G = 200
I = 50 – 2r
(M/P) = (M/P) = Y – 6r
(a) Solve for the equilibrium values of Y and r, assuming P = 10 and M = 4,000. (6 pointa)
(b) Assume the federal government reduces spending to balance the budget. Calculate the effective
IS-LM multiplier and explain why the equilibrium reduction in output was less than the value
implied by the Keynesian-cross multiplier. (6 pointa)
Suppose that
y =100 (income today)
• y' = 150 (income tomorrow)
10% (interest rate on bonds)
%3D
r =
• t = 10 (taxes today)
• t' = 10 (taxes tomorrow)
Suppose that c = 100. Is the consumer borrowing or saving, today? And what will her budget constraint look tomorrow?
The consumer is borrowing.
Her budget constraint tomorrow will be
c' = 150 -10 - 10*(1.1) = 129
The consumer is saving.
Her budget constraint tomorrow will be
c' = 150 -10 + 10*(1.1) = 151
O The consumer is neither borrowing nor saving - she is breaking even.
Her budget constraint tomorrow will be
c' = 150 -10 = 140
O The consumer is saving.
Her budget constraint tomorrow will be
c' = 150 + 10*(1.1) = 161
%D
U = c¹/² + Bc¹²/2 tt+1
A) Suppose that the household faces two within period budget constraints of the form:
C++ 1 = Y++1 + (1+r)s
Combine the two period budget constraints into one intertemporal budget constraint.
B) Use the intertemporal budget constraint and this utility function to derive the Euler
equation characterizing an optimal consumption plan.
C) Use this Euler equation and the intertemporal budget constraint to derive a
consumption function expressing cas a function of Y, Y₁+1, and rt.
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