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revision_01-09 - Answers to Review Questions#1-9 Econ 102...

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Econ 102 Fall 2008 Prepared by Amy Brown 1. Friedrich August von Hayek was a Nobel-prize-winning economist who is among the leaders of what is known as the Austrian school. Aus- trian school economists blamed the interference of government agencies for business cycles, which they called "credit cycles." In an e/ort to ex- low, leading to credit expansion in a bubble that would burst. The credit boom causes capital resources to be misallocated into areas unattractive to investors under a stable monetary supply. A recession occurs as a correction to this misallocation. 1 2. Lucas de&nes business cycles as "co-movements among di/erent aggrega- tive time series" such as output, pro&ts, prices, interest rates and mone- tary aggregates (the stock of money). 2 These series ±uctuate repeatedly around a general time trend, behaving in essentially the same way across developed nations. 3. We want to see the value of the stream of income and costs. (a) The present discounted value of the cost of the project is PDV c = $100 + $210 1 : 05 = $300 (b) Recall that the present discounted value of a perpetuity is PDV p = c r where c is the coupon value and r is the interest rate. Since the perpetuity won²t pay o/ until next period, we need to discount it. Thus the net present value of the project is NPV = $20 0 : 05 $300 = $400 $300 = $100 (c) Since the net present value of the project is positive, the project is worth undertaking. 4. Firms produce with technology Y = AL and households have preferences U = log ( C ) + log (1 L ) 1 Wikipedia, "Austrian Business Cycle Theory" and "Friedrich Hayek" articles, downloaded from http:³³www.wikipedia.org on September 29, 2008. 2
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revision_01-09 - Answers to Review Questions#1-9 Econ 102...

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