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1、Chapter5AClosed-EconomyOne-PeriodMacroModel1TheModelTheeconomythatweconsiderisaclosedeconomy,i.e.onethatdoesnottradewithothereconomies.Besidesrepresentativeconsumerandrepresentativefirm,thereisanadditionalagent:thegovernment.GovernmentTheonlyactionofth
2、egovernmentistoimplementfiscalpolicy.Fiscalpolicyreferstothegovernment’schoicesoveritsexpenditures,taxes,transfersandborrowing.2TheGovernmentSupposethegovernmentwishestopurchaseagivenquantityofconsumptiongood,G.Sincethereisonlyoneperiod,thegovernmentcan
3、notborrowtofinanceG.ThusGispaidbytaxingtherepresentativeconsumer.Thegovernmentmustobservethebalancedbudgetconstraint,G=T.3CompetitiveEquilibriumCompetitivereferstothefactthatallconsumersandfirmsareprice-takers.Equilibriumreferstothestatewhentheactionsof
4、allconsumersandfirmsareconsistent.FormalDefinition:AcompetitiveequilibriumisasetofendogenousquantitiesC,Ns,Nd,TandY,andanendogenousrealwagew,suchthat,giventheexogenousvariablesG,z,andK,thefollowingaresatisfied:41)CandNssolvestheconsumer’sproblem,maxU(C
5、,h-Ns)C,NssubjecttoC=wNs+-TandC0,Ns0.Inotherwords,CandNsmustsatisfytheFOC,U2(C,h-Ns)-wU1(C,h-Ns)=0.2)Ndsolvesthefirm’sproblemgivenz,Kandw.ThustheFOCissatisfied.53)Market-clearingconditions:LabormarketclearingNs=Nd=N4)BalancedBudgetconstraint:G=T.Weh
6、ave:GoodsmarketclearingY=C+GCombiningthetwoFOCs,wehaveU2(C,l)-zF2(K,h-l)U1(C,l)=0.Since=zF(K,h-l)-wNdandG=T,fromthebudgetconstraintC=zF(K,h-l)-G.Fromthese,wecansolvefortheequilibriumCandl.6GraphicalIllustrationsStep1:Derivetheproductionpossibilitiesfr
7、ontier(PPF),whichdescribesthetechnologicalpossibilitiesfortheentireeconomy,intermsoftheproductionofCandl.Step2:PutthePPFtogetherwiththeconsumer’sindifferencecurves,sothatwecananalyzeacompetitiveequilibriuminasinglediagram.7ProductionPossibilitiesFrontie
8、rInequilibrium,wehaveNd=Ns=N=h-l.OutputisgivenbyY=zF(K,h-l).whichisarelationshipbetweenoutputandleisure.Y*isthelevelwhenl=0.8ProductionPossibilitiesFrontierInequilibrium,C=Y-G=zF(K,h-l)-GarelationshipbetweenCandl,giventheexogenou