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Williamson Macroeconomics ch9 Solutions
Williamson Macroeconomics ch9 Solutions
H. K. Chen (SFU)
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we = y t +
y0 t0
120 10
= 100 20 +
= 180.
1+r
1 + 0.1
(b) Suppose that current and future consumptions are perfect complements for
the consumer and that he or she always wants to have equal consumption in the
current and future periods. Draw the consumer's indierence curves.
Indierence curves for perfect complements is L-shaped
Utility function generating these curves has the form
U (c, c0 ) = min{c, c0 },
H. K. Chen (SFU)
> 0.
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198
115.18
110
94.24
E1
U1
80 94.24 120
115.18
H. K. Chen (SFU)
U2
E2
180
AQ1 (c)
AQ1 (d)
AQ1 (e)
ECON 305 Tutorial 7 (Week 9)
220
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we = c + (1 + r)1 c0
c0 = 0.91(180 c).
(1)
c = c0 .
(2)
Draw
H. K. Chen (SFU)
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we = 140 20 +
120 10
= 220.
1 + 0.1
Draw
(e) Explain the dierences in your results between parts (c) and (d).
Consumer switches from borrower in (c) to lender in (d) due to a suciently
large increase in the current period income.
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we0 = y + (1 + r)1 y0 .
Lifetime wealth after the shift is
>0
if r > 0
we1 > we0 whenever r > 0, and so the employee should take the option,
provided that interest rate is positive.
H. K. Chen (SFU)
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c0
(1 + r)we1
(1 + r)we0
slope = (1 + r)
y0
y0 x
we1
y
H. K. Chen (SFU)
y + x we0
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H. K. Chen (SFU)
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c0
(1 + r)we0
Consumption in both
periods will drop.
Saving also goes down:
(1 + r)we1
E1
y0
y t
H. K. Chen (SFU)
Consumption smoothing
implies that c will
decrease by an amount
less than t
Recall s = y t c
E0
y we1
we0
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c0
(1 + r)we0
Consumption in both
periods will drop.
Saving is ambiguous.
E0
y0
E2
y0 t
y t
H. K. Chen (SFU)
we0
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(1 + r)we
slope = (1 + r)
(1 + (1 x )r )y + y0
y0
slope = (1 + (1 x)r)
H. K. Chen (SFU)
we
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Consumer is unaected if
initially a borrower.
(1 + r)we
If initially a lender,
(1 + (1 x )r )y + y0
and post-policy
consumption bundle is at
point C,
C
y0
H. K. Chen (SFU)
we
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Saving is unaected.
There is a borrowing constraint B .
Budget line becomes vertical at B .
(1 + r)we
y0 t0
x
y t B
we
we y + t
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H. K. Chen (SFU)
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A
B
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H. K. Chen (SFU)
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c1 +
c10
y0
= y+
s ( y c1 ) .
1+r
1+r
(1)
c20
= y+
1+r
c0
(1 + u) c2 + 2
= y+
1+r
c2 +
c0
y0
u c2 + 2
1+r
1+r
(2)
y0
.
1+r
(3)
H. K. Chen (SFU)
(4)
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1
c0
u = R c2 + 2
1+r
1
c20
c0
c2 + 2
1+r
1+r
1
y0
y0
= y+
y+
R
1+r
1+r
1+u =
=======
R + c2 +
c10
(1 + u) c1 +
Q y+
1+r
1
0
c
y0
y0
1
y+
c1 +
= y+
y+ R
1 + r 1 + r
1 + r
H. K. Chen (SFU)
y0
1+r
y0
1+r
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Tax on savings changes the slope of the budget line, thus creating income and
substitution eects.
The consumption taxes in this question are equivalent to a lump-sum tax,
which creates a pure income eect, and hence lead to no distortion in
consumer's behavior.
H. K. Chen (SFU)
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(1 + s)c +
H. K. Chen (SFU)
y0
(1 + s0 )c0
= y+
.
1+r
1+r
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(1 + s)c +
(1 + s0 )c0
y0
= y+
.
1+r
1+r
Changes in s, s0 alters the slope of the budget line, thus creating distortions in
consumer's decisions.
So Ricardian equivalence does not hold here.
H. K. Chen (SFU)
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L + (L) = T +
H. K. Chen (SFU)
T0
1+r
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c+
c0
= (y + ` t) +
1+r
y0 (1 + r)` t0
1+r
where the lower case `, t, t0 are loan and taxes for an individual consumer.
(d) Show that the size of the government loan program (i.e., the quantity L) has
no eect on current consumption or future consumption for each individual
consumer and that there is no eect on the equilibrium real interest rate. Explain
this result.
Loan size does not change the PV of taxes, and does not aect interest rate.
Therefore, no change in consumptions.
H. K. Chen (SFU)
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MC113
MC solutions:
15:
610:
1113:
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