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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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?
Consumption next year = $30,000 + ($60,000-$70,000) * 1.1 = $19,000

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