Lecture 4 Assignment

1. A change in interest rate on bonds from 0.07 to 0.1. What effect does this have in u-vh space?

As is evident from the graphical representations below; capital output decreases only slightly more than when in its original state. Correspondingly however, it increases at a faster rate in the long term when shocked.

The value of households also has a similar outcome. The value of the household begins at a lower figure but increases steadily to over double the value of the non-shocked state.

2. Show a change in the value of α from 0.3 to 0.7.

The shock in the accelerator effect impacts negatively on both output and the households values. The capital output increases initially but subsequently reduces slighlty to the constant value of 0.92.


The shock to the value of households is quite drastic as the household value quickly falls below 1.