ECON 2450 Study Guide - Final Guide: Economic Equilibrium, Competitive Equilibrium, Real Wages
Document Summary
Wai-ming ho (a) the lifetime budget constraint of a consumer (y t) + 1 + r (b) the lifetime budget constraint of the government m t + (c) the consumer maximizes lifetime utility subject to the lifetime budget constraint. The optimal consumption bundle is at the point where the budget line is tangent to an indi erent curve, 1 + r = m rsc,c(cid:48). The optimal consumption decision is given by the condition 1 + ra = m rsc,c(cid:48). In a closed economy, the credit market clears when the aggregate quantity of consumers" savings (private saving), sp, is equal to the quantity that the government wants to borrow, sg. The equilibrium real interest rate, ra, is the level of r that clears the markets. (e) if (cid:52)t < 0 and (cid:52)g = (cid:52)g(cid:48) = 0, then m(cid:52)t + m(cid:52)t(cid:48) The government"s saving decreases in the current period.
