rev_mid2 - Study Guide for Midterm#2 Econ 102 Fall 2008...

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Study Guide for Midterm #2 Econ 102 Fall 2008 University of California, Los Angeles Prepared by A.C.S. Brown For the next midterm, here°s a list of the topics and equations (up to lectures 9-10, not because 9-10 are not important but because it°s Halloween and I°m tired. I°ll update this for lectures 9-10 tomorrow) that I think you all should be familiar with: 1. Competitive banking (a) Remember how to use balance sheets to show that the return to bank°s equity will equal the return to capital, and (b) The return to deposits will be lower than the return to capital. (c) This is because banks have two purposes: i. To act as a ±nancial intermediary, and ii. To provide a liquidity service. 2. Uncertainty (a) Expected value expresses the probability-weighted average of an event whose outcome is uncertain. (b) If an event x can take on the values A and B with certain probabili- ties, the expected value of x is E [ x ] = P ( x = A ) ° A + P ( x = B ) ° B If you think of a coin toss, the expected value of a coin toss where you bet $1 on heads is $0.5, because half the time you will get the $1 and half the time you°ll get nothing. 3. Asset prices in an endowment economy (a) Budget constraint over two periods: today : B R = Y 1 ± C 1 nextday : C 2 = Y 2 + (1 + r ) B R where Y i is the period endowment (like income), C i is the period consumption in real terms (apples from the Lucas tree), B R is savings in real terms and r the interest rate.
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