Test 3 Practice 3 - Answer Key - ECON 102 Practice 3 Test 3 Macroeconomic Theory Please be BRIEF in answering the following questions Use only the

Test 3 Practice 3 - Answer Key - ECON 102 Practice 3 Test 3...

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ECON 102: Practice 3 - Test 3 Macroeconomic Theory Please be BRIEF in answering the following questions. Use only the provided blue books. Work alone and do not use any type of “external help”, other than a standard calculator. You have 80 minutes to work on your test. Good luck! 1. (5 points) Recently Argentina nationalized the main oil firm in the country, YPF-Repsol,after having been privatized 20 years ago.Why do you think this decision was highlycriticized? Use the idea of Time Consistency. 2. (5 points) Compare the volatility of consumption, investment, and output in the U.S. econ-omy. Why is this comparison important when constructing macroeconomic models? 3. (5 points) Shocks to TFP are usually modeled as an AR(1) process. Explain how this process looks like and what its parameters represent. An AR(1) process has the following form. z t = ρz t - 1 + σ t where t ∼ N (0 , 1) The parameter ρ represents the coefficient of first order autocorrelation (this is, the correla- tion between TFP in one period and TFP in the previous period). The closer this number is to 1, the more persistent is TFP. The coefficient σ indexes how important are the random shocks in the evolution of TFP. Since these random shocks, t , are assumed to be distributed following a standard normal distribution, σ is also the variance of these random shocks.

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