Fall2015MT1 Solution (1) - Name Solutions Economics 304...

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1Name: Solutions Economics 304, Spring 2010 Midterm 1 Please put all papers away. No calculators, no cell phones, no computers: nothing electronic is allowed. The exam is scheduled for 80 minutes. There are 90 points total on the exam, plus 3 extra credit points. Part 1: Definitions (3 points each) 1)Extensive Margin of Labor Supply: The entry and exit of workers into labor market in response to changes in real wages. 2)Natural level of output: The level of output that would occur if expected prices equal to actual prices: Pe = P. 3)Reservation wage: The minimum wage needed for workers to join the job market, reflects the value of their outside “non-working” options. 4)Random walk hypothesis: Changes in consumption should be unpredictable. The best guess for tomorrow’s consumption level is today’s consumption. 5)Crowding out: GrI↓
2Part 2: Short but important Questions (5 points each) 1) What is the Permanent Income Hypothesis? Describe three pieces of evidence that Milton Friedman argued were consistent with the PIH but inconsistent with traditional Keynesian consumption functions.

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