C
N
Engel Curve(W=W0)
U=U0
U=U1
U=U2U=U3
Figure 1: Normality of Consumption and Leisure
Figure 2: Long-Run Preferences and Technology Diagram
(The Effect of an Increase in G)C
N
MBLR
(MBLR)´
LMELR
(W=W*)
-G
-G’
N* N*΄
C*C*´
Figure 3: A Higher W* Raises LMELR (the Engel Curve for W*)
N
U=U0
U=U1
U=U2U=U3
LMELR
(W=W*)
(LMELR)´(W=W*´)
Figure 4: Effect of an Increase in Z
On Long-Run EquilibriumC
N
MBLR
(MBLR)´LMELR
-G
N*N*΄
C*
C*´
(LMELR)´
Figure 5: Illustration of Lemma 1
β
(β,…)
(ξ2 ,β,…)
(ξ0 ,β,…)
(ξ1 ,β,…)
ˆ
Figure 6:Felicity-Saving Possibility Frontier
S
U
slope= -Θ
slope= -Θ´
Figure 7: Money-Metric Net Felicity-Labor Possibility Frontier
N
slope= -W
slope= -W´
( , )U C N C T
Figure 8: Effect of a Higher Wage on the U-S Possibility Frontier
S
U
slope= -Θ
slope= -Θ
N2 dW
N1 dW
Figure 9: The Effect of Higher N on Optimal C when UCN>0
C
UC
Θ
UC(C,N2)
UC(C,N1)
C1 C2
≈UCN(C,N) ΔN
Figure 10: The Factor Price Possibility Frontier
W
R
FPPF(Z)
slope= -N/K
Figure 11: Labor Supply and Demand
W
N
Nd(K,Z)
Ns(Θ)+
+ +
Figure 12: Contemporaneous Preferences and Technology
DiagramU=U0
C
N
CMB[C=F(K,N,Z)-XK-G]
Figure 13: The Investment Demand Curve
θ
X
II [θ=λ–q(X)]ˆ
λ
Figure 14: An Increase in Labor Supply
N
Nd(K,Z)
Ns(Θ)
Ns(Θ´)
W
Figure 15: Consumption Falls When Θ Increases
C
N
W=W0
W=W1
N0 N1
Figure 16: An Increase in K Raises Labor Demand
N
Nd(K,Z)
Ns(Θ)
W
Nd(K΄,Z)
Figure 17: An Increase in K Causes a Movement Along the FPPF
W
R
FPPF(Z)
K/N high
K/N low
Figure 18: An Improvement in Technology Shifts the FPPF Out
W
R
FPPF(Z) FPPF(Z΄)
Figure 19: Comparative Statics of the Saving Supply Curve
X
θSS(k,Z,G)
+ + -
Figure 20: The Effect of an Increase in X, Given K, Z and G
C
CMB0
CMB1
[C=F(K,N,Z)-X1K-G]
N
U=U0
U=U1
N0 N1
C1
C0
Figure 21: The Effect of an Increase in K, Given X, Z and G
C
CMB0
CMB1
[C=F(K,N,Z)-XK1-G]
N
U=U0
U=U1
N0N1
C1
C0
Figure 22: Shifting Out the Investment Demand Curve (λ↑)
θ
X
II0 [θ=λ0-q(X)]ˆ
λ0
II1 [θ=λ1-q(X)]ˆ
λ1
SS
θ0
θ1
X0 X1
Figure 23: Shifting Out the Saving Supply Curve (K↑, Z↑, or G↓)
θ
X
II [θ=λ-q(X)]ˆ
λ
SS0
θ0
θ1
SS1
X0 X1
Figure 24a: Phase Diagram with Upward-Sloping λ=0 Locus
(Low Adjustment Costs)
•
k
λ
λ=0•
k=0•
saddle path
k0 k*
λ0
λ*
•
Figure 24b: Phase Diagram with Vertical λ=0 Locus
(Medium Adjustment Costs)
•
k
λλ=0•
k=0•
saddle path
k0 k*
λ0
λ*
•
Figure 24c: Phase Diagram with Downward-Sloping λ=0 Locus
(High Adjustment Costs)
•
k
λλ=0•
k=0•
saddle path
k0 k*
λ0
λ*
•
Figure 25: II-SS When Moving Down the Saddle Path (K↑ and λ↓)
θ
X
II1 [θ=λ1-q(X)]ˆ
λ1
SS(K0,Z,G)
θ0
θ1
SS(K1,Z,G)
X1 X0
II0 [θ=λ0-q(X)]ˆ
λ0
k
λ
λ=0 (old)•
k=0 (old)•
k*newk*old
λ*new
λ*old
Figure 26a: DGE Effects of a Permanent Increase in G(Low Adjustment Costs)
k=0 (new)•
λ=0 (new)•
λ0
k
λλ=0 (old)•
k=0 (old)•
k*newk*old
λ*new
λ*old
Figure 26b: DGE Effects of a Permanent Increase in G(High Adjustment Costs)
k=0 (new)•
λ=0 (new)•
λ0
k
λ
λ=0 (old)•
k=0 (old)•
k*newk*old
λ*new
λ*old
Figure 27a: DGE Effects of a Permanent Increase in Z
(Wealth Effect Dominates Rental Rate Effect)
k=0 (new)•
λ=0 (new)•
λ0
k
λ
λ=0 (old)•
k=0 (old)•
k*newk*old
λ*new
λ*old
Figure 27b: DGE Effects of a Permanent Increase in Z
(Rental Rate Effect Dominates Wealth Effect)
k=0 (new)•
λ=0 (new)•
λ0
k
λ
λ=0 (old)•
k=0 (old)•
k*newk*old
λ*new
λ*old
Figure 27c: DGE Effects of a Permanent Increase in Z
(Equal and Opposite Wealth and Rental Rate Effects)
k=0 (new)•
λ=0 (new)•