Econ 314 Prelim 2
(Fall 2008)
1. (10 points) Explain why it is impossible to have the net return for renting capital equal to
4% and the return for lending equal to 4% (that is,
r
t
−
4% and
i
t
−
1
5%).
2. (10 points) The individual maximizes
U
c
0
,
c
1
c
0
c
1
subject to 2
c
0
c
1
1. What
is the optimal
c
0
,
c
1
?
3. (50 points) Consider the version of lifecycle model with
u
c
yt
,
c
ot
1
ln
c
ot
1
and
F
A
t
,
K
t
,
L
t
A
t
K
t
L
t
1
−
and with constant population. Let
N
10,
0.5,
A
t
4all
t
,and
K
0
90. The government provides public services in the amount of
G
10, all
t
.Let
g
G
/
N
.Let
k
t
denote the capital holding per old person at the start of
t
.
(1) Suppose that the government balances the budegt each
t
(sonodeficit)andthat
G
is
financed by taxing old people. Explain why the transitional equation is
k
t
1
1
−
A
t
k
t
.
Then compute the steady state values of each old person’s consumption, and each person’s
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 Spring '07
 MBIEKOP
 Macroeconomics, 4%, Public services, Equals sign, 1 K, 1 5%

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