Econ 102 Fall 2008
Prepared by Amy Brown
1. Friedrich August von Hayek was a Nobelprizewinning 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 "comovements 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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 Fall '08
 Serra
 Macroeconomics, Inflation, Interest Rates, Interest Rate, Net Present Value, real wage, present discounted value

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