MT1 Spring 2017 solutions.pdf - Name Economics 320L Spring...

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Name: Economics 320L, Spring 2017 Midterm 1 Please put all papers away. No calculators, no cell phones, no computers: nothing electronic is allowed. The exam is scheduled for 80 minutes. There are 80 points total on the exam. Part I Definition 1. Intensive margin of labor supply : Workers adjust the number of hours that they work in response to changes in the real wage. 2. Permanent income hypothesis : Consumers are forward looking and consume at the level equal to the present value of their permanent income. Or: Consumption respond greatly to a persistent change in income and very little to a transitory change. 3. Natural level of output : The level of output when the expected price and the actual (realized) price agree. 4. Ricardian Equivalence : Government’s finance does not affect consumption because people internalize the government's budget constraint when making consumption decisions. 5. Animal Spirits : Investors’ expected return to investments, which is positively related to their investment decisions. Part II Consumption theory 1. The general form of tangency condition is ࠵?࠵? ࠵? ! = ࠵? 1 + ࠵? ࠵?࠵? ࠵? ! . As for Ms. 1, the tangency condition is that ࠵? ! = ࠵? ! . The intuition is that the marginal utility of consuming one extra unit today (LHS) must be the same as the discounted marginal utility of consuming it along

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