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Unformatted text preview: Econ 102  Answer key for second midterm Josef Schroth, November 12, 2008 Question 1 See answer key to assignment 4. Question 2 Yes or No, depending on justification. If rents are high relative to house prices then the price earnings ratio that home owners face is very low. In general this means that houses are relatively cheap so that a bubble is unlikely. However, current rents are not a perfect indicator for future rents. So if rents are expected to decline current house prices might as well be too high so that a bubble is still possible. Question 3 1. We consider the following difference equation x t = 4 x t 1 4. (a) See answer key to assignment 5 for a very similar graph. (b) In steady state it must be true that x t = x t 1 = x ss . Then x ss = 4 x ss 4 ⇔ 5 x ss = 4 ⇔ x ss = 4 5 . (c) We observe that   4  > 1. Hence the steady state is not stable and the sequence of x t ’s diverges for any starting point other than x ss . Note that in this ’economy’ there is only one equilibrium, the steady state....
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 Fall '08
 Serra
 Macroeconomics, Thermodynamics, Pricing, Englishlanguage films, Economic equilibrium, Arrow securities

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