mid_ans_F02 - p 1 ) = e 1 + ( λθ ) − 1 ∆ m 1 . (d)...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 2
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Midterm Exam’s Answer Key University of California at Berkeley Econ 202A, Macro Theory Fall 2002 George Akerlof, Andrea De Michelis October 29, 2002 1. Shapiro-Stiglitz The investor solves: ( p H =10+ 1 / 2 1 . 25 p L + 1 / 2 1 . 25 p H p L =0+ 1 / 4 1 . 25 p H + 3 / 4 1 . 25 p L The solution is: p H =25 . 0 ,p L =12 . 5 . Thus, a risk neutral investor is willing to pay no more than $25. Note: if one assumes that fundamental asset equationiso ftheformin terestratet imeassetva lueequa ls f ow bene F ts plus expected (not discounted) capital gains, then p H is $20. 2. Near-rationality (a) p 0 =argmax p p ( m 0 p p ) p 0 = p 0 = m 0 since in equilibrium p p . (b) p 1 =argmax p p ( m 1 p p 0 ) = arg max p p ( m 0 + ε p m 0 ) p 1 = m 0 (1 + . 5 ε ) Thus, by not reoptimizing the F rm looses p 1 q 1 ( p 1 ) p 0 q 1 ( p 0 )= . 25 ε 2 m 2 0 (c) Yes, it is near-rational because the loss is of an order of magnitude smaller than the shock. 3. Exchange Rates (a) Using the LM equation: p 0 = m 0 φ y + λ r . (b) Thus, p 1 = m 1 φ y + λ r = p 0 + m 1 . (c) Recall that in equilibrium: e t e = ( λθ ) 1 ( p t p ) . Thus, e 0 = e 1 ( λθ )
Background image of page 4
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: p 1 ) = e 1 + ( λθ ) − 1 ∆ m 1 . (d) Thus, the exchange has to overshoot by: e − e 1 = ( λθ ) − 1 ∆ m 1 . 4. Consumption The Euler condition for the problem is: u ( c t ) = E t u ( c t +1 ) , or since utility is quadratic and so marginal utility is linear: u ( c t ) = u ( E t c t +1 ) . (a) Thus, 1 − ac 1 = 1 − bE 1 c 2 = 1 − dE 1 c 3 , or E 1 c 2 = a b c 1 and E 1 c 3 = a d c 1 . When she plans consumption in period 1, her expected income is 3 Y , she sets c 1 so that c 1 + a b c 1 + a d c 1 = 3 Y ⇒ c ∗ 1 = 3 bd bd + ab + ad Y . (b) When she plans consumption in period 2, her expected income is 3 Y + ε 1 − c 1 , she sets c 2 so that c 2 + b d c ∗ 1 = 3 Y + ε 1 − c ∗ 1 ⇒ c ∗ 2 = 3 ad bd + ab + ad Y + d d + b ε 1 . 1...
View Full Document

This note was uploaded on 08/01/2008 for the course ECON 202A taught by Professor Akerlof during the Fall '07 term at University of California, Berkeley.

Page1 / 4

mid_ans_F02 - p 1 ) = e 1 + ( λθ ) − 1 ∆ m 1 . (d)...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online