602_Fall08_FinalExamSolutions.pdf - Department of Applied...

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Department of Applied Economics Johns Hopkins UniversityEconomics 602 Macroeconomic Theory and Policy Final Exam Professor Sanjay Chugh Fall 2008 December 8, 2008 NAME: The Exam has a total of four (4) questions and pages numbered one (1) through eleven (11). Each problem’s total number of points is shown below. Your solutions should consist of some appropriate combination of mathematical analysis, graphical analysis, logical analysis, and economic intuition, but in no case do solutions need to be exceptionally long. Your solutions should get straight to the point – solutions with irrelevant discussions and derivations will be penalized.You are to answer all questions in the spaces provided. You may use two pages (double-sided) of notes. You may use a calculator. Question 1 / 15 Question 2 / 15 Question 3 / 28 Question 4 / 42 TOTAL /100
11. A National Service Program (15 points). Consider the following radical policy proposal: rather than taxes being levied on individuals and the proceeds of those taxes being used by the government to fund various programs, suppose that every individual pays no taxes of any kind but must give ten hours of his time every week to national service. Here you will analyze this national service program in the context of the (one-period) consumption-leisure model we have studied. Thus, there are now three uses of the individual’s time: work, leisure, and national service (the mandatory 10 hours).Assume the following: - Instituting the national service program has no effect on any prices or wages in the economy. - Any time spent voluntarily performing national service beyond the required 10 hours is considered leisure. a.(8 points) Using the notation we developed in Chapter 2 (i.e., cto denote consumption, to denote hours of work per week, lto denote hours of leisure per week, Pto denote the nominal price of consumption, and Wto denote the nominal hourly wage), construct the representative agent’s (weekly) budget constraint in this model with a national service program. Recall that there are 168 hours in one calendar week. Provide brief economic justification for your work. n

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