ASSIGNMENT No. 1
(Units: 1–4)
Q.1 a) What is the difference between Read Business Cycle (RBC) Model and that of Keynesian type?
Solve the RBC model in a special case. (10)
b) Following the RBC model in part (a) assume that each period correspond to a quarter and take for
baseline parameter values =
3
1
, g = 0.5%, n = 0.25% δ = 2.5% ρA = 0.95. ρG = 0.95, and
G
, ρ and
b such that (G /Y)* = 0.2, r* = 1.5% and l* =
3
1
.
Show the following. (10)
i) The effects of technology shocks
ii) The effects of changes in government purchases
Q.2 a) Review the textbook Keynesian model of AD. What are
dM
di
and
dM
di
for given value of P.
And if real money supply increases due to decrease in price level then show the affect of this
change on LM curve and AD curve. (10)
b) If in the derivation of LM curve we adjust M to keep i always equal to
i
instead of assuming M is
exogenous. (10)
i) What is the slope of LM curve?
ii) What is the slope of AD?
Q.3 Discuss the need for real rigidity under New Keynesian paradigm keeping in view the following aspects.
(20)
a) General considerations
b) Specific sources of real rigidity
c) Explain by a quantitative example
(d) Other type of friction
Q.4 Compare and contrast the household consumption behavior of life cycle hypothesis with that of
permanent income hypothesis. (20)
Q.5 Given the Cobb- Douglas production function. (20)
Y = Kδ Lβ δ + β = 1
i) Is Euler’s theorem satisfied when δ + β ≠ 1? Explain
ii) Find out the firm’s choice of K. Given choice of K what is the profit function.
iii) Find first order condition for the choice of L and see whether second order condition is satisfied or
not.
iv) Solve the first order condition in part (iii) for L as a function of P, Y, w, and rK. How do changes
in each of these variables affect L?
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