05 Jun Question Economics 602 Macroeconomic Theory and Policy
Question
Economics 602
Macroeconomic Theory and Policy
Assignment 7
Professor Sanjay Chugh
Summer 2015
Due:
July 20, 2015 at 12:00noon
Submission:
Through Blackboard
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Grading criteria:
A numerical value of 0, 1, 2, or 3, in which a zero
corresponds to not having submitted the assignment at all
or submitting it later than the deadline, a three
corresponds to having completed the assignment (nearly)
perfectly, and one and two are intermediate scores.
Impulse Response Function. Suppose a one-time TFP shock occurs, as shown below.
steady-state TFP
time
The period
of the
shock
Macroeconomic Theory and Policy | © Sanjay K. Chugh
1
As we have studied, an increase in TFP leads to an outwards shift in labor demand (recall
this from our firm analysis unit), which, as long as the upward-sloping labor supply
function does not shift, leads to an increase in the real wage.
Using an infinite-horizon (which, recall, is a heuristic for a many, many, many timeperiod framework) of the combined consumption-savings and consumption-labor
framework (which is an extension of the brief two-period framework of Chapter 5),
qualitatively plot an impulse response function for the representative consumers
optimal labor supply that lines up with the impulse response profile for TFP drawn
above.
Use the lifetime utility function
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