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)•