Question 1

In the real intertemporal closed economy model, what is the effect of a temporary increase in government spending $$G on $$the output demand curve?

Accepted Answer

It shifts the output demand curve to the right by the full amount of the increase in $$G.$$

Question 2

Suppose the marginal propensity to consume (MPC) is 0.8. If the government increases spending by $$\100$, what is the total equilibrium increase in output $$\Delta Y$ according to the multiplier formula in the real intertemporal model?

Accepted Answer

$$\Delta Y = \frac{\100$$}{1 + 0.8} = \$$55.56$$

Question 3

Which of the following best describes the representative consumer's lifetime budget constraint in the two-period model?

Accepted Answer

$$C + \frac{C'}{1+r} = w h + \pi - T + \frac{w' h' + \pi' - T'}{1+r}$$

Question 4

If the real interest rate $$r$$ increases, what is the predicted effect on current labour supply, assuming the substitution effect dominates the income effect?

Accepted Answer

Current labour supply increases as the opportunity cost of leisure rises.

Question 5

A firm in the real intertemporal model will optimally invest until which of the following conditions is satisfied?

Accepted Answer

The net marginal product of future capital equals the real interest rate: $$MPK' - d = r$$

Question 6

If there is an exogenous increase in current total factor productivity $$z$$, what happens to the current labour demand curve?

Accepted Answer

It shifts to the right because the marginal product of labour increases.

Question 7

Which of the following is a correct statement about the effect of an increase in lifetime wealth on the representative consumer's behaviour?

Accepted Answer

It increases the demand for consumption goods and decreases current labour supply.

Question 8

In the real intertemporal model, what is the effect of an increase in expected future total factor productivity $$z' on $$current investment?

Accepted Answer

Current investment increases because the future marginal product of capital is higher.

Question 9

Suppose the government increases current taxes $$T to $$finance a temporary increase in government spending $$G. $$What is the effect on the representative consumer's lifetime wealth and current consumption?

Accepted Answer

Lifetime wealth decreases and current consumption falls by $$MPC 	imes \Delta T.$$

Question 10

Which of the following best describes the effect of a positive house price shock in the real intertemporal model?

Accepted Answer

It increases the value of household collateral, increasing consumption and investment.

Question 11

In the real intertemporal model, what is the effect of a pandemic that reduces both total factor productivity and labour supply?

Accepted Answer

Both output supply and output demand curves shift to the left, reducing equilibrium output.

Question 12

Which of the following is the correct intratemporal optimality condition for the representative consumer in the current period?

Accepted Answer

$$MRS_{l,c} = w$$

Question 13

If the substitution effect of a real wage increase is larger than the income effect, what happens to current hours worked?

Accepted Answer

Current hours worked increase.

Question 14

Which of the following is the correct formula for the present value of the government's intertemporal budget constraint?

Accepted Answer

$$G + \frac{G'}{1+r} = T + \frac{T'}{1+r}$$

Question 15

If the marginal propensity to consume (MPC) is less than 1, what does this imply about the slope of the output demand curve?

Accepted Answer

The output demand curve is upward sloping and flatter for higher MPC.

Question 16

Which of the following best describes a market bubble as discussed in the context of the real intertemporal model?

Accepted Answer

A situation where the price of an asset exceeds its fundamental value due to non-fundamental factors.

Question 17

In the real intertemporal model, what is the effect of an exogenous increase in the current capital stock $$K on $$the marginal product of labour (MPL) and the marginal product of capital (MPK)?

Accepted Answer

MPL increases and MPK decreases.

Question 18

Suppose the representative firm faces a decrease in the current capital stock $$K. $$What is the effect on the firm's optimal investment schedule?

Accepted Answer

The optimal investment schedule shifts to the right.

Question 19

Which of the following is a plausible real-world example of an exogenous increase in future total factor productivity $$z'$$?

Accepted Answer

A major technological breakthrough expected to be implemented next year.

Real Intertemporal Closed Economy Model: Consumption, Labour, Investment, and Equilibrium (Chapter 11 Study Notes)

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