JHU_Fall2014_MidtermExamSolutions(2).pdf - Department of...

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Macroeconomic Theory and Policy – Midterm Exam | © Sanjay K. Chugh 1 Department of Applied Economics Johns Hopkins UniversityEconomics 602 Macroeconomic Theory and Policy Midterm Exam Suggested Solutions Professor Sanjay Chugh Fall 2014 NAME: The Exam has a total of four (4) problems and pages numbered (including this cover page) one (1) through seventeen (17). 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 should solutions 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 your class notes, text, and lecture slides as needed; but you are on your honor to neither use any other materials whatsoever nor collaborate with anyone (inside the class or outside the class) in completing the exam. Problem 1 / 25 Problem 2 / 25 Problem 3 / 15 Problem 4 / 35 TOTAL / 100
Macroeconomic Theory and Policy – Midterm Exam | © Sanjay K. Chugh 2 Problem 1: Two-Period Consumption-Savings Framework (25 points). Consider the two-period economy (with zero government spending and zero taxation), in which the representative consumer has no control over his real income (y1in period 1 and y2in period 2). The lifetime utility function of the representative consumer is 2211,lncu c cc. (Note:that is not a typo – it is only1cthat is inside a ln(.) function, c2is notinside a ln(.) function). The lifetime budget constraint (in real terms) of the consumer is, as usual, 22110(1)11cycyr arr. Suppose the consumer begins period 1 with zero net assets (a0= 0), and as per the notation in Chapters 3 and 4, r denotes the real interest rate. a.(7 points) Set up a lifetimeLagrangian formulation for the representative consumer’s lifetime utility maximization problem for the given utility functionDefine any new notation you introduce. .
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Macroeconomic Theory and Policy – Midterm Exam | © Sanjay K. Chugh 3

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