1 The Neoclassical Model (Modified Exercises 3 from GLS Ch18 on page 426 ) Consider the basic Neoclassical model. Suppose we assume specific functional forms for the consumption and investment demand functions. These are: Ct = c1(Yt Gt) + c2(Yt+1 Gt+1) c3rt It = d1rt + d2At+1 + d3Kt Here, c1 through c3 and d1 through ds are fixed parameters governing the sensitivity of consumption and investment to different factors relevant to those decisions. (a) Which variables are endogenous and which ones are exogenous in the above consumption and investment functions? (b) What are the signs (i.e. positive or negative) of c1, c2, and c3? (For example, is c1 > 0 or < 0?) Determine the sign (+/-) of each parameter in the consumption function. Explain the economic intuition of the sign of each parameter. (c) Apart from the sign of c1, what else you can say about the value of c1? Why? 1 (d) What are the signs (i.e. positive or negative) of d1, d2, and d3? (For example, is d1 > 0 or < 0?) Determine the sign (+/-) of each parameter in the investment function. Explain the economic intuition of the sign of each