(Requires Appendix Material)The Long-Run, Stationary State Solution of an AD(p,q)model $a _ { 0 }$

question 47

Essay

(Requires Appendix material)The long-run, stationary state solution of an AD(p,q)model, which can be written as A(L)Y_t = ?₀ + c(L)X_t-1 + u_t, where $a _ { 0 }$ = 1, and $a _ { j }$ = -?_j, c_j = ?_j, can be found by setting L=1 in the two lag polynomials. Explain. Derive the long-run solution for the estimated ADL(4,4)of the change in the inflation rate on unemployment:
$\widehat { \Delta I n f }$ _t = 1.32 - .36 ?Inf_t-1 - 0.34vInf_t-2 + 0.7?Inf_t-3 - 0.3?Inf_t-4
-2.68Unemp_t-1 + 3.43Unemp_{t-2 -} 1.04Unemp_t-3 + .07Unemp_t-4
Assume that the inflation rate is constant in the long-run and calculate the resulting unemployment rate. What does the solution represent? Is it reasonable to assume that this long-run solution is constant over the estimation period 1962-1999? If not, how could you detect the instability?

Identify how indifference curves and the marginal rate of substitution influence consumer choice.

Analyze the impact of income changes, prices of goods, and preferences on a consumer's optimal choice.

Calculate consumer's income and price of goods given budget constraints.

Understand the relationship between wage changes and labor supply decisions in the work-leisure model.

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