# akfm - First Midterm Exam Spring 2005 Prof Andrew Atkeson...

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First Midterm Exam Spring 2005 (April 28, 2005) Prof. Andrew Atkeson Econ 106-F Student Name: ___________________________________________________________________ Instructions: You have 70 minutes to complete this exam. There are eight questions. Each question is worth 10 points. Write your answers in the space provided beneath each question. You should use scratch paper to figure out what you want to write and then put down you answer neatly and concisely. For the problems, if some calculation is involved, a typical answer should read something like “Solve this formula for X and then choose to invest in the project only if X>0” and write down the appropriate formula. For the essays, think of 3 or 4 appropriate sentences that express the key idea and write those down. Restrict yourself to writing something legible in the space provided. For example, in response to the question “Explain how the household saving rate can fall at the same time that the ratio of household net worth to income is rising.” You might write the following “Standard accounting measures of household savings do not include capital gains on assets as part of income. Thus, if asset prices rise rapidly, the ratio of household net worth to income can rise even if households save very little of the standard measure of their income” Something that short is perfectly adequate. You should spend the 6-7 minutes you have on the essay figuring out exactly what to say in the space provided.

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Question 1: a) Mr. Free has \$100 dollars income this year and zero income next year. The market interest rate is 10% per year. If Mr. Free consumes \$20 this year, and invests the rest in the market, what will be his consumption next year? Consumption next year = (\$100-\$20) * 1.1 = \$88 b) Ms. Newcastle has \$60,000 income this year and \$30,000 next year. The market interest rate is 10% per year. Suppose Ms. Newcastle consumes \$70,000 this year. What will be her consumption next year?
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