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3 . Preference Shock in a RBC Model ( 3 0 points ) Assume in a two - period real inter - temporal model, the
Preference Shock in a RBC Model points Assume in a twoperiod real intertemporal model, the utility function has the following separable form:
UC C N Nlog Ceta log NPeriod beta logCeta 'logNPeriod
where C C are consumption and N N are labor. Parameter eta or eta indicates consumer's preference for leisure or dislike for labor while beta indicates the degree of impatience. Now, analyze the general equilibrium effects of a decrease in eta and an increase in beta in the real business cycle model. First, consider the effects of a decrease in eta a Explain how it changes the consumer's problem intuitively. How does that affect the labor supply Ns points b How does that change affect the good market supply and demand Using these results, can you determine the effects of the change on the current output Y employment N consumption C investment I, wage w and interest rate r Use graphs to illustrate. points c Consider the effects of this change on the credit market. Suppose after eta decreases, consumers are smoothing consumption and increasing their savings. Determine the effect on interest rate r and investment I. Use graphs to illustrate. points Second, consider the effects of an increase in beta d Explain how it changes consumer's problem intuitively. How does that affect the labor supply Ns and the consumption demand Cd Write the related first order conditions to support your argument. points e How does the increase of beta influence the labor market and good market supply and demand Determine the effects of this change on all equilibrium quantities and prices as above N Y C I, r w Use appropriate graphs to illustrate. points
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