# M and B

## Quiz 12 :Modern Macroeconomic Models

Question Type
How does a dynamic model differ from a static model? Why is that difference important?
Free
Essay

Define dynamic model as a model in which actions that occur at one time affect that happens at other times and static model as which focuses on what is happening at just a particular point in time.
The main notable difference between dynamic l and static models of a system is that a dynamic model refers to a runtime model of the system and while static model does not refer during runtime. Another difference is the use of differential equations in dynamic model which are obvious by their absence in static model. Dynamic model keeps on changing reference to time whereas static models are equilibrium of in a steady state.
Dynamic model is the representation of static components of the system whereas Static model is more structural than behavioral. Dynamic model consists of sequence of operations, activities, interactions and memory whereas static model is inclusive of class diagrams and objects diagrams and helps in depicting static components of the system.
Dynamic model is flexible as it can change from time to time with the possibilities that might arise during the course time. Static model is more rigid than dynamic model as it can be changed and is at equilibrium in a steady state.

Tags
In the two-period model of consumption and saving, what element of a graph shows all the possible amounts the household can consume?
Free
Essay

In the two-period model of consumption and saving, Budget Constraint Line shows all the possible amounts that the household can consume. The budget line is a link between the consumption and the savings. It delivers the optimum allocation resource between the two components.

Tags
Under what circumstances will a household have precautionary savings?
Free
Essay

Generally a household will have a precautionary savings when the incomes in future are uncertain i.e. when they do not have certainty of their income in the future they tend to have precautionary savings.
This is proved in the case of farm families who do not have security about their future income as at any time bad weather may change their expectations. So these families save large amounts of precautionary savings.

Tags
What are expectations, and why are they important, in macroeconomic models? What would you think about a macroeconomic model that assumed that people's expectations of infl ation were constant, even though the infl ation rate changed over time?
Essay
Tags
What does it mean to have rational expectations?
Essay
Tags
Describe how macroeconomic models have evolved from the early 1980s through the DSGE models of today.
Essay
Tags
Why are some economists doubtful of the value of RBC models?
Essay
Tags
What is the difference between homogeneousagent models and heterogeneous-agent models? Which do you think is more realistic? Which do you think is more diffi cult to work with because it is technically more complicated?
Essay
Tags
How does a univariate time-series model differ from a VAR model?
Essay
Tags
What are the problems a researcher encounters in trying to use a VAR model to investigate the effects of monetary policy? What type of VAR model can be used to solve these problems?
Essay
Tags
Draw a fi gure showing a household's budget constraint in a two-period model if the household's income is $10,000 in period 1 and$12,000 in period 2, and the interest rate is 20 percent. Assume that the price of the good is $1 in both periods. Show three points on the budget constraint: the point with no borrowing or saving, the point with all consumption in period 2, and the point with all consumption in period 1. Show what happens to the budget constraint if the interest rate rises to 40 percent. Show the same three points as before. Essay Answer: Tags Suppose that a household in a two-period model has income of$30,000 in period 1 and $25,000 in period 2, and the interest rate is 75 percent. Assume that the price of the good is$1 in both periods. Suppose that the household decides to consume 26,000 in period 1 and 32,000 in period 2. Now suppose that the interest rate falls to 50 percent, and the household decides not to borrow or lend at all. Is the household better off or worse off with the higher interest rate?
Essay
Tags
Suppose that an economy consists of 100 households, 50 of which have no income in period 1 and income of $50,000 in period 2 and 50 of which have income of$40,000 in period 1 and no income in period 2. Assume that the price of the good is $1 in both periods. Suppose that each household decides that its consumption in period 1 will equal one-half the present value of its income from both periods. Find the equilibrium value of the interest rate. How much does each household save in period 1 and consume in each period? Essay Answer: Tags An economy has 75 households, all of which have incomes of$25,000 each in period 1, 50 of which have incomes of $40,000 each in period 2, and 25 of which have incomes of$20,000 each in period 2. Assume that the price of the good is $1 in both periods. Suppose that each household decides that its consumption in period 1 will equal 50 percent of the present value of its income from both periods. a Find the equilibrium value of the interest rate. b Now suppose instead that each household will consume 60 percent of the present value of its income from both periods in period 1. Now what is the equilibrium value of the interest rate? c Finally, suppose that each household's period 1 consumption equals one-half the present value of its income from both periods, but everyone's income in period 1 is lower: just$20,000. What is the equilibrium value of the interest rate now?
Essay
Tags
Describe how the budget constraint of a household in a two-period model is affected by each of the following changes. In each case, do you think the household is better off or worse off, or is the answer ambiguous? If ambiguous, what does the answer depend on? a Period 1 income is lower. b The interest rate is higher. c Period 2 income is lower, and the interest rate is lower.
Essay