mid_ans_F04

# mid_ans_F04 - The difference is due to the fact that the...

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University of California at Berkeley Econ 202A, Macro Theory Fall 2004 George Akerlof, Kory Kroft 1. (i) (1) aggregate demand (2) aggregate supply (3) money supply rule (ii) E[y t | 2 t-1 ] = b[E[p t | 2 t-1 ] - E[p t | 2 t-1 ]] = 0 4 E[p t | 2 t-1 ] = E[m t | 2 t-1 ] + E[u t | 2 t-1 ] = " m t-1 + \$, t-1 = 3 " i v t-i + \$, t-1 i=1 Note : the last equality follows from the fact that an AR(1) can be expressed as an MA( 4 ) under the usual stationarity condition, | " | < 1. 2. (i) the exchange rate, e, does not change at time T. (ii) the price level, p, does not change at time T. (iii) Since the money supply increases by 10%, the interest rate must adjust to clear the money market. Note that we can rewrite the money market condition in logarithmic form so that: logm - logp = 1/2logy - 1/2logr From this, it is easy to see that dm/dr*(r/m) = -1/2. Hence if the money supply increases by 10% at time T, the interest rate must fall by 10%/‰ = 20%. Note : It is also a solution if you derive the exact change in r. This is 21%.

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Unformatted text preview: The difference is due to the fact that the above solution is an approximation to the actual change in r. 3. The Euler condition for this problem is u&(c 1 ) = 1/2[E[u&(c 2 )]], or since utility is quadratic and so marginal utility is linear: u&(c 1 ) = 1/2[u&(E[c 2 ])]. Thus, 24 - 2c 1 = ‰[24 - 2E[c 2 ]] ] 24 - 2c 1 = 12 - E[c 2 ] (1) r = 0 Y c 1 + c 2 = y 1 + y 2 Y c 1 + E[c 2 ] = y 1 + E[y 2 ] y 2 ~ U[3,9] Y E[y 2 ] = 6 Y c 1 + E[c 2 ] = 12 Y E[c 2 ] = 12 - c 1 (2) Substituting (2) into (1) yields: 24 - 2c 1 = 12 - (12 - c 1 ) = c 1 Y c 1 = 8. 4. There are 3 strategies conditional on owning the plot of land: One can harvest every year, every two years or every three years. Let V i denote that value of harvesting after the ith year. Ophelia should be willing to buy the land for at most V = max{V 1 ,V 2, V 3 }. V 1 = 10/2 + V 1 /2 Y V 1 = 10 V 2 = 36/4 + V 2 /2 Y V 2 = 12 V 3 = 77/8 + V 3 /8 Y V 3 = 11 Hence V = 12....
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mid_ans_F04 - The difference is due to the fact that the...

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