Consider the two-period model in partialequilibrium, i.e. the endowment economy. Assume that there is a decrease in technology such that the endowment in the first period decreases (relative to standard level, say) but the endowment in the future remains unaffected. Explain graphically and in words the effects of this change on the optimal intertemporal allocation of consumption, assuming that without the endowment change the consumer would have been a lender in the first period. Explain the effects of this change on the intertemporal prices, Disentangle the effects of the overall change in endowment between income and substitution effects.

Consider the two-period model in partialequilibrium, i.e. the endowment economy. Assume that there is a decrease in technology such that the endowment in the first period decreases (relative to standard level, say) but the endowment in the future remains unaffected. Explain graphically and in words the effects of this change on the optimal intertemporal allocation of consumption, assuming that without the endowment change the consumer would have been a lender in the first period. Explain the effects of this change on the intertemporal prices, Disentangle the effects of the overall change in endowment between income and substitution effects.

Macroeconomics

13th Edition

ISBN:9781337617390

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter15: Monetary Policy

Section: Chapter Questions

Problem 1QP

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