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Review of the Course

Eco 311; 2016 spring


You should be familiar with the following topics and concepts. You should be
able to conduct comparative statics in each of the following models.
1. Static General Equilibrium (Williamson ch.4 and ch.5)
1.1. Households problem choosing consumption and leisure.
- The indifference curve.
- The marginal rate of substitution (MRS).
- FOC. Intuition.
- Interior and corner solutions.
- Income and substitution effects.
1.2. Firms choosing labor input
- FOC. Intuition.
1.3. Competitive equilibrium
- Definition of the competitive equilibrium.
- Walras law.
- The social planners problem.
- The Pareto optimality.
- The production possibility frontier.
- Can you graphically represent (i) the C.E. and (ii) the planners solution?
- Is the competitive equilibrium Pareto optimal?
- Laffer curve.
2. Dynamic General Equilibrium (Williamson ch.9 and ch.10)
2.1. Households problem choosing a consumption sequence.
- FOC (the Euler equation). Intuition.
- What determines the slope of consumption profile (i.e., growth rate)?
- What determines the level of consumption profile?
- Permanent income hypothesis.
- Credit market frictions. Interior and corner solutions.
2.2. Firms choosing both labor and capital inputs.
- FOCs and intuitions.
- Constant returns to scale (CRS).
- What is the profits in equilibrium when the production function exhibits
CRS?
2.3 Competitive equilibrium
- The definition.
- Is the competitive equilibrium Pareto optimal?
- The government budget constraint.
- Ricardian equivalence.
3. Solow Model (Acemoglu ch.2)
- What are the basic setup and assumptions?
- Can you derive fundamental law of motion for k in the Solow model? Can
you explain the basic logic behind it? Can you show it in a graph?
- How is the steady state level of capital determined?
- Can you introduce population growth and/or technological progress?
- The balanced growth path.
- Transition dynamics in k, y, c, and i.
- Golden rule saving rate. What is it and how can you find it?

4. Neo-classical Growth Model (Acemoglu ch.8)


- What is the difference from the Solow model?
- FOCs and intuitions.
- The definition of the competitive equilibrium.
- Can you derive the equations summarizing the model?
- Can you find the steady state?
- Modified Golden Rule. How is it different from the Golden rule in the Solow
model? In which case is the capital stock larger? What is the intuition?
- The phase diagram. Transition dynamics. The basic logic. Why diverging
path is suboptimal.
5. Real Business Cycle Model (King and Rebelo 2000)
- The difference from the neoclassical growth model we saw before.
- FOCs and intuitions.
- The definition of the competitive equilibrium.
- Discussion on the utility function. What has to happen to the MRS to make
the RBC model consistent with the balance growth path? What does it
intuitively mean?
- Calibration. What is the idea?
- What is the basic logic of the RBC model to make output, consumption,
hours worked, and investment positively respond to a productivity shock?
What are the amplification and the propagation built into the model? Can
you explain them using (i) marginal products of labor and marginal products
of capital, (ii) the income and substitution effects, and (ii) consumption
smoothing (i.e., inter-temporal substitution)?